1 Universität Siegen Fakultät III Univ.-Prof. Dr. Jan Franke-Viebach Klausur Monetäre Außenwirtschaftstheorie und politik / International Macro Wintersemester 2011-12 (1. Prüfungstermin) Bearbeitungszeit: 60 Minuten Zur Beachtung: 1. Die Klausur umfasst 10 Seiten (einschl. dieses Deckblatts). Bitte prüfen Sie die Vollständigkeit der Klausur. 2. Benutzen Sie für Ihre Ausführungen die vorgesehenen Lösungsfelder. Reichen diese nicht aus, benutzen Sie die Rückseiten der Blätter. Mit Bleistift angefertigte Lösungen werden nicht bewertet. 3. Hilfsmittel: nichtprogrammierbarer Taschenrechner 4. ACHTUNG: Die Variablen-Namen haben die gleiche Bedeutung wie in der Vorlesung. Sofern Sie ebenfalls für die Variablen die Symbole aus der Vorlesung verwenden, brauchen Sie sie nicht zu definieren. Question 1 2 3 4 5 Sum Mark Points achievable 14 8.5 11 10.5 16 60 Points achieved
2 Problem 1: Forex market The following diagram depicts the market for foreign exchange. The foreign currency that is traded on the market is the United States dollar. e $ D [$] a) In the diagram, designate the foreign currency demand schedule with D d and the foreign currency supply curve with D s. [2 points] b) Assume we have a system of flexible exchange rates. b 1 Designate the point of equilibrium in the two-dimensional space as point A. [1 point] b 2 On the axes of the diagram, depict the equilibrating exchange rate as e* and the amount of traded foreign currency as D*. [2 points]
3 c) Let us now assume a system with a fixed exchange rate. c 1 Please name the two constituting elements of this sort of system very briefly. [2 points] c 2 Suppose that at the given fixed exchange rate a surplus demand for foreign currency exists. Depict this situation in the diagram above by drawing in a corresponding exchange rate e 1. Mark the point in the two-dimensional space that represents the amount of traded foreign currency at the given exchange rate. Also mark the amount of traded foreign currency on the horizontal axis as D 1. [4 points] d) Name the two sources of demand for foreign exchange. [2 points] e) Name one of the functions of the foreign exchange market. [1 point]
4 Problem 2: Forward market A German company is exporting some equipment to Switzerland and will receive 10 million Swiss francs three months from now. The current spot exchange rate is 1.5543 [SFr/ ]. The treasurer of the company expects the franc to depreciate in the next weeks, and is concerned about it. The three-month forward rate is 1.5320 [SFr/ ]. a) Given the treasurer s expectations, what action can he take using the forward contract? [3.5 points] b) Three months later, the spot exchange rate turns out to be 1.5101 [SFr/ ]. Did the company benefit because of the treasurer s action? Please do the necessary calculations to prove your answer. [5 points]
5 Problem 3: Purchasing Power Parity (PPP) Theory a) Which variable does the PPP theory try to explain? [1 point] b) Sketch the main idea underlying the explanation by completing the following sentence: We will have to pay more euros for one dollar, the [4.5 points]
6 c) PPP as well as PPP theory make a statement about the variables P, P f and e. Please very briefly say what the difference is between PPP and PPP theory. [2 points] d) What is the difference between the traditional version and the modern version of the PPP theory? [3.5 points]
7 Problem 4: In the sequel, i and i f denote the domestic and the foreign interest rate, respectively. e is the spot exchange rate (direct rate: one unit of the foreign currency costs e units of the domestic currency); e e is the expected spot rate one year ahead. a) What is the following equation called? [1 point] i = i f + e e e e b) Please express the economic content of the equation in words. [3.5 points]
8 c) Which assumptions about the long run are needed for the equation in a) to simplify to the following equation? [4 points] i = f i d) Which particularity holds for a small country (for the equation in a) as well as for the equation in c))? [2 points].
9 Problem 5: Portfolio Balance Approach to the Exchange Rate We are given the equilibrium conditions for the money market and for the market for foreign assets: M = m (i, i f ) ( M + B + e F ), e F = f (i, i f ) ( M + B + e F ). a) Please visualize the equilibrium curves of the two markets in the following graph (denote them by M and by F, respectively): [3 points] e i b) The Portfolio Balance Approach tries to give an explanation of short-run movements of the exchange rate. Why does it only take financial markets into account? [4 points]
10 c) Say we observe an increase in the foreign interest rate (i f ). c 1 Does the equilibrium curve of the market for foreign assets shift to the right or to the left? Please explain. [5 points] c 2 Suppose we want to calculate the horizontal shift of the equilibrium curve of the market for foreign assets. This requires taking the total differential of the corresponding equation. Please take the total differential of the equation. (You do not need to make more calculations.) [4 points]