True of False: Cirele whether the statement is true (T) or false (F). (worth 2 p

Question

True of False: Cirele whether the statement is true (T) or false (F). (worth 2 pts. each. 1) Suppose Mexico has borrowed in S's from the rest of the world (i.e., the debt is denominated in S). If the peso were to appreciate against the S than the value of the debt in peso terms would have increased. 2) Assume the spot exchange rate is 30.2 yenveuro and the forward rate is 28.3 yeneuro. Assuming both covered and uncovered interest rate parity holds, this implies that the market expects the yen to appreciate. 3) If the inflation rate in the U.S. is 6 percent for the next year and the inflation rate in the U.K. is 3 percent for the next year, relative PPP suggests that the dollar is expected to depreciate against the pound. 4) If 1 euro is equivalent to 2.6 yen and 1 yen is equivalent to 5 dollars, than 1 euro is equal to 1.3 dollars 5) The law of one price tends to hold better with heavily traded primary goods like gold. 6) To reduce future exchange rate risk you should use the spot exchange rate market. 7) When absolute purchasing power parity does not hold between the U.S. and Canada it implies that the S-price of a bundle of goods in the U.S. is different from the (converted) S-price of the same bundle of goods in Canada. 8) Deviations from uncovered interest rate parity tend to get smaller in times of financial turmoil 9) Suppose a U.S. citizen regularly purchases foreign goods. Than the appreciation of the S would make these goods more expensive. 10) Interest rate parity connects changes in interest rates between countries with changes in the inflation rate.

Explanation / Answer

False True False True False False True False False(cheaper) False(interest rate and exchange rate)

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