Submit the answers to to the following questions in the unit 8 drop box. You must explain your answer and provide your supporting computations. Yes/No answers or simple numbers are not acceptable and will not receive full credit.
1. Why do we have a reason to expect that market forces will keep prices (adjusted for exchange rates) the same? Explain.
2. What is the real sector of the economy, what are the associated parity conditions, and how are they different from each other? Which one tends to hold the best? Explain why.
3. What makes relative PPP a useful guide for predicting exchange rate movements over the long-run? Would this effect your incentive to cover your exchange rate risk? Explain.
4. What is the financial market, what are the parity conditions associated with it, and how do they differ from one another? Which one tends to hold best? Explain why.
5. Assuming the same financial market transaction costs and risks, will funds tend to move toward the U.S. or Japan if the U.S. interest rate is 5%, the Japanese interest rate is 2%, and there is a forward discount on the dollar of 2%? How will this effect CIP between the two nations? Explain.
6. Is the forward rate on a currency a good predictor of the future spot rate? Explain.
7. Two economies make only pickles and then trade jars of them. If S > P/P*, how might arbitrage involving jars of pickles lead to the condition of absolute PPP?