1. You have $100 to invest and are considering both U.S. government bonds and Fr
ID: 1116140 • Letter: 1
Question
1. You have $100 to invest and are considering both U.S. government bonds and French bonds that bonds is 2%. The current exchange rate is $1.20 / € 1.00; in one year it is expected to be $1.32 / a. Is it better for you to invest in the U.s. bonds or the French bonds? Justify your answer. pay off in Euros. The interest rate on U.S. government bonds is 8% and the rate on French 1.00. b. Is the foreign exchange market between dollars and euros in equilibrium? Why or why not? How would you expect the exchange rate to change in the short run? c. d. Suppose the U.S. Federal Reserve has committed to pegging the exchange rate at $1.20 / 1.00. Given the interest rates above, what adjustments does the Fed need to make to support the fixed exchange rate? ostic cra peliticians takeExplanation / Answer
A - It is better to invest in US government bonds since it is a worldwide superpower, the world's biggest economy and it has the most fluid capital markets. The Treasury security yield is regularly depicted as the risk-free resource for the monetary framework, the thing you purchase when you are stressed over the worldwide economy or budgetary framework.
B- The foreign exchange market is not under equilibrium because many variables such as inflation, growth rate, government restrictions and interest rate do change on regular basis and this makes the market fluctuate a lot. TIn the event that market members have assumptions with respect to these progressions, they will follow up on them now, creating indistinguishable outcomes from if these progressions were really happening.
C- In the short run, movements of currency respond to short-run differences in interest rates so that short-run rates of return are equalized across borders.
D - On the off chance that the Fed needs to fix the exchange rate, at that point it must be willing to trade the household cash for the reference money at a settled rate. By and large, the national bank will have no issue providing its own cash, yet it would require huge stores of the reference money since it would need to stand prepared to trade one for the other. For example, in 2007, Hong Kong had $136 billion, which was more than 7 times the measure of Hong Kong dollars available for use, to keep up its pegging
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