Financial Markets and Institutions (2-downloads)

10. If nominal interest rates in America rise but real inter-

est rates fall, predict what will happen to the U.S.

exchange rate.

11. If American auto companies make a breakthrough in

automobile technology and are able to produce a car

that gets 60 miles to the gallon, what will happen to

the U.S. exchange rate?

12. If Mexicans go on a spending spree and buy twice 

as much French perfume, Japanese TVs, English

sweaters, Swiss watches, and Italian wine, what will

happen to the value of the Mexican peso?

13. If expected inflation drops in Europe so that inter-

est rates fall there, predict what will happen to the

exchange rate for the U.S. dollar.

14. If the European central bank decides to contract the

money supply to fight inflation, what will happen to

the value of the U.S. dollar?

15. If there is a strike in France, making it harder to

buy French goods, what will happen to the value of

the euro?

Q U A N T I TAT I V E   P R O B L E M S

1. A German sports car is selling for 70,000 euros. What

is the dollar price in the United States for the German

car if the exchange rate is 0.90 euros per dollar?

2. An investor in England purchased a 91-day T-bill

for $987.65. At that time, the exchange rate was

$1.75 per pound. At maturity, the exchange rate

was $1.83 per pound. What was the investor’s hold-

ing period return in pounds?

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Chapter 15 The Foreign Exchange Market