a. Countries with high inflation need to keep devaluing their currencies to maintain competitiveness. But countries that try to maintain their competitiveness by devaluing their currencies only end up with even higher inflation. Discuss
b. Each of the following questions need to be explained in a minimum of 50 words.
I. The growth rate of national income is higher than in India than in Japan. What will happen to the value of Indian rupee against the Japanese yen?
II. Mexican wages rise relative to Chinese wages, while Mexican productivity falls behind Chinese productivity, what would happen to the value of peso versus Chinese yuan?
III. Prices in United States and Germany are rising at the same rate, what will happen to the value of euro versus U.S. dollar
IV. Real interest rates are higher in Canada than in the United States, what will happen to the value of C$ relative to U.S. dollar?
V. United States imposes import duties on goods imported from Mexico and Mexico does not retaliate, what would happen to the value of U.S. dollar?
2. a. Suppose, £1 = $2. Inflation in the UK is 5% and inflation in United States is 3%.
I. Which currency should appreciate and why?
II. Which currency should depreciate and why?
III. If the exchange rate does not change, which country becomes more competitive in the global market place?
c. Suppose, you are given the following information: 2007: €1 = JPY 150 2017: €1 = JPY 125
I. Which currency has appreciated? Which currency has depreciated?
And by how much is the appreciation or depreciation?