Q26. An economy is in long-run equilibrium and the values of its imports and exports are equal. If the growth rate of the money supply is unexpectedly decreased, what are the most likely effects on real GDP and the country’s current account balance?

            Real GDP     Current account

A)      Increase                 Suplus

B)      Decrease         Deficit

C)      Decrease         Surplus

Q27. George Gao, CFA, is a currency portfolio manager who believes that the asset market approach can be applied to make short run forecasts of exchange rates based on the long-term effects of the changes in a country’s money supply. Recently, Japan unexpectedly reduced its money supply by 5%, increasing interest rates from 1.5% to 2.0%. Japan’s current spot rate is 108.74 Japanese yen per United States dollar (JY/USD). George believes that it will take two years for the effects of the decrease in the money supply to reduce the inflation rate in Japan. The current interest rate in the U.S. is 1.5%. Based on George’s calculations, the decrease in the money supply will translate to an immediate spot exchange rate of:

A)   115.59 JY/USD.

B)   103.30 JY/USD.

C)   102.29 JY/USD.

Q28. Valerie Connors, CFA, is an economist with PJ Morton Bank. She wants to use the asset markets approach to make short run forecasts on the value of several currencies. She has decided to use the asset markets approach for the euro. One of the shortcomings of the asset markets approach is that:

A)   it cannot help determine forward rates.

B)   it cannot help determine expected future spot exchange rates.

C)   its use is limited to the determination of inflation rates.

Q29. Nathan Hawk, CFA, is an economist with National City Bank. He wants to use the asset markets approach in determining the current spot exchange rates for the Mexican peso. Nathan needs to know what components affect the peso. Which of the following groups contain the most important components of the asset markets approach?

A)   Inflation and interest rates.

B)   Forward exchange and risk-free rates.

C)   Money supply and inflation rates.

答案和详解如下：

Q26. An economy is in long-run equilibrium and the values of its imports and exports are equal. If the growth rate of the money supply is unexpectedly decreased, what are the most likely effects on real GDP and the country’s current account balance?

            Real GDP     Current account

A)      Increase                 Suplus

B)      Decrease         Deficit

C)      Decrease         Surplus

Correct answer is B)

Real GDP is likely to decrease as higher real interest rates (resulting from slower money supply growth) reduce business investment and consumers’ purchases of durable goods. The current account initially moves into surplus as decreasing real GDP reduces domestic incomes and the demand for imports. However, higher real interest rates will cause the domestic currency to appreciate, making imports less expensive and exports more expensive. Thus imports are likely to increase while exports decrease, which should more than offset the initial effect and result in a current account deficit.

Q27. George Gao, CFA, is a currency portfolio manager who believes that the asset market approach can be applied to make short run forecasts of exchange rates based on the long-term effects of the changes in a country’s money supply. Recently, Japan unexpectedly reduced its money supply by 5%, increasing interest rates from 1.5% to 2.0%. Japan’s current spot rate is 108.74 Japanese yen per United States dollar (JY/USD). George believes that it will take two years for the effects of the decrease in the money supply to reduce the inflation rate in Japan. The current interest rate in the U.S. is 1.5%. Based on George’s calculations, the decrease in the money supply will translate to an immediate spot exchange rate of:

A)   115.59 JY/USD.

B)   103.30 JY/USD.

C)   102.29 JY/USD.

Correct answer is C)

The yen is the DC and the U.S. dollar is the FC. The quotes are in yen/USD, or DC/FC.

The pricing of exchange rate expectations by the asset market approach requires two steps:
Step 1: Identify the long-run expected exchange rate value [E(S₁)] based on purchasing power parity.

E (S₁) = S₀ × [(1 + i_DC) / (1 + i_FC)] where S is quoted in DC/FC.

Step 2: Infer the short-run value of the exchange rate, S₀, assuming the uncovered interest rate parity holds. Remember that the uncovered interest parity is a relationship between the spot rate, the expected spot rate, and the interest rate differential:

E (S₁) / S₀ = [(1 + r_FC) / (1 + r_DC)]

Assuming this relationship holds, then solve for the value of the spot rate today, given the long-run expected value and current interest rates:

S₀ = E(S₁) × [(1 + r_DC) / (1 + r_FC)]

If the price adjustment occurs over a longer time period, say t periods, then:

S₀ = E(S_t) × [(1 + r_DC)^t / (1 + r_FC)^t]

This problem has two steps: Step 1 and Step 2, hence:

E(S₁) = 108.74 JY/USD × ( 1 − 0.05/(1.00)) = 103.3 JY/USD

S₀ = 103.3 JY/USD × [1.015²) / (1.02²)] = 102.29 JY/USD

The Japanese Yen should immediately appreciate against the U.S. dollar to 102.29 JY/USD.

Q28. Valerie Connors, CFA, is an economist with PJ Morton Bank. She wants to use the asset markets approach to make short run forecasts on the value of several currencies. She has decided to use the asset markets approach for the euro. One of the shortcomings of the asset markets approach is that:

A)   it cannot help determine forward rates.

B)   it cannot help determine expected future spot exchange rates.

C)   its use is limited to the determination of inflation rates.

Correct answer is A)

The asset markets approach depends on two steps that involve relative purchasing power parity and uncovered interest rate parity. Both methods are not used in the determination of forward rates. Only the interest rate parity method is used to determine forward rates.

Q29. Nathan Hawk, CFA, is an economist with National City Bank. He wants to use the asset markets approach in determining the current spot exchange rates for the Mexican peso. Nathan needs to know what components affect the peso. Which of the following groups contain the most important components of the asset markets approach?

A)   Inflation and interest rates.

B)   Forward exchange and risk-free rates.

C)   Money supply and inflation rates.

Correct answer is A)

Essentially, exchange rates represent the supply and demand for currency based on the market’s forecasts of inflation and interest rates. As a result, only news concerning inflation expectations and real interest rates will affect exchange rates. The asset market approach is used to estimate the change in exchange rates based on some disturbance in the fundamental value of a currency. For example, a sudden change in monetary policy will change inflation expectations and exchange rates.

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