Effects of reduced short term interest rates through FED in U.S. on foreign funds flow, the value of dollar, and how they increase the probability of U.S. economy strengthening.

Answer:  the value of dollar making is lowered he U.S. consumers to use the excess dollars to purchase foreign goods and this would make the purchasing goods by dollars to hike. It would cause imported goods to have a higher and eventually cause an increase in the prices of local goods. Additionally, reduction in interest rate will mostly bring down costs associated with borrowing making business to spend more on investment. Household will spend on durable goods like new homes (Svensson, 1994).

18) An Australian dollar is strengthened by the raised interests, Hong Kong dollar is tied to U.S., and subsidiary borrowed funds from U.S. parents(pays $100 000 interest per month).

Answers: explanation over the effects of

a)Volume of subsidiary sales measured (A$):volume of sales will lower. An increase in interest would lead to an increase in the prices of locally produced goods. The money in circulation will reduce causing an increase in the borrowing cost, loans would not be readily available and people’s purchasing power will be lowered.

b)The cost to subsidiary of purchasing materials (A$): The Australian dollar will have been strengthened as compared to other countries currencies and it will have an improved buying power to the world. The Australian dollar will therefore have an improved.

c)The cost of subsidiary making interest payment to the parent in U.S. (A$): The Australian dollar will have improved its value over the U.S. and this will mean that the cost of the subsidiary to make profit payment is reduced.

26) Finland government devaluated it currency by 40 percent against dollar due to inflation and it has trade restriction to non-U.S. countries. Will devaluation increase or decrease inflation.

Answer: it increases inflation. It will cause more exports and less import making the economy to be almost in full capacity. The price of imports will have increased and this will lower profit margin for sellers like retailers. Their exports may also become less competitive leading to increased costs in the long run.

Chapter 7

23) Economic expansion may cause high demand on loan amounts to local firms. How would these affect the forward discount rates?

Answer: The currency of the country will have high interest rates and that makes forward discounts to be discounted due to parities in interest rates.

26) Asian Central Bank had maintained a stable value in respect of its currency before the Asian crisis begun. However, the forward rate of southeast Asian currencies exhibited discount.

Answer: most of the Asian countries had invested in capital assets other than factor productivity. Those countries in east as had maintained a fixed exchange rate that influenced citizen to borrow and it’s this borrowing that later caused the Asian Crisis (Pempel, (1999).

34) Calculate the change by what percent against the Japanese yen over the last year given the table below:

Current year


1$=4 argentine peso

Last year

1 yen=$0.01

1 argentine peso=0.30$

Answer: 0.166667:0.2=3:4=42.86%:57.14%

36). Based on the information, the forward rate of the Canadian dollar ex habited a …. [Discount or premium] this morning …. [Increased or decreased] this afternoon. Explain.









Maintained and lower

Declined and higher

Answer: It would be premium in the afternoon and unaffected. When making purchase of a contract, the difference between on spot price and the future price can be positive or negative. In case it becomes positive it is called premium and when it is negative it is called discount. The forward rate of Canadian dollar will not change when buying out the contract.

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