Chapter 10 Formulas and Definitions All symbols are as in th…
Chapter 10 Formulas and Definitions All symbols are as in the textbook and lectures. Unless otherwise stated, you can assume that two countries have purchasing power parity (PPP) and interest rate parity. Exchange rate when there is PPP: R = P / P*. In this formula, P and P* can be regarded as prices of individual goods or of consumption baskets. Approximate relationship when there is interest rate parity: i – i* = (F – R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i – i* = F/R – 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i=1.0134, a foreign interest rate of 22.5% is written i*=1.225. Note that you may be asked to enter answers as percentages, though. ***************************** Information for questions 13-15 The figure represents possible supply and demand curves for the Brazilian Real (symbol R). The vertical axis is in the usual unit of U.S. dollars per Real. Note that one vertical grid spacing is 1 cent. Initially the Real is trading with supply curve S0 and demand curve D0, therefore the initial exchange rate is 0.13 $ / R. For numeric questions, only the exact answer is accepted, so double check that you are reading the graph correctly. All graphical answers can be made exact with the assumption: if two curves seem to cross where two grid lines also cross, then they do. At a later time, suppose that supply is S2 and demand is D2. An American speculator purchases 10,000 Real as an investment. How much does he pay for this, in dollars? Only exact answer is accepted, so double check that you are reading the graph correctly.
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