1a. In June 2016: The currency in Singapore is Singapore Dollar. Singapore had a
ID: 1140057 • Letter: 1
Question
1a. In June 2016:
The currency in Singapore is Singapore Dollar. Singapore had an inflation rate of -0.5 and an aggregate price of 0.83.
The currency in New Zealand is New Zealand Dollar. New Zealand had an inflation rate of 0.5 and an aggregate price of 1.45.
The published exchange rate in Singapore was 1.0511 New Zealand Dollar per Singa- pore Dollar.
Answer the following questions given the June 2016 short-run trend in the exchange rate for New Zealand Dollar in Singapore, ceteris paribus? Show your work.
(a) What is the real exchange rate for New Zealand currency in Singapore?
(b) What will be the nominal exchange rate one year after June 2016 ?
(c) What will be the published exchange rate one year after June 2016 ?
1b. Use the graphical relationship between net exports and real exchange rate to illustrate the following events. Be sure to label your plots completely.
A sudden decrease in domestic fiscal spending.
A sudden decrease in the global interest rate.
A sudden decrease in domestic investment.
A sudden relaxation of trade restrictions.
Explanation / Answer
1a.
Singapore currency= Singapore Dollar
New zealand CURRENCY = New Zealand Dollar
a) The real exchange rate for New Zealand currency in Singapore is
1 New Zealand Dollar = 0.91 Singapore Dollar
b) % change in the nominal exchange rate after one year = inflation in New Zealand - inflation in Singapore
= 0.5 - (-0.5)
= 1%
Nominal exchange rate will be 1.0511*(1 + 1/100) = 1.0616 Singapore Dollar per NZ Dollar.
c) Same as above
1b.
A sudden Decrease in domestic fiscal spending will increase the national savings, increasing the supply of domestic currency to be exchanged and invested abroad. Saving over investment line will shift to the right which will further lead to depreciation in the real exchange rate and increase in net export.
The increase in global interest rate will lead to capital outflow because the domestic investment will be less attractive as compared to investments abroad. This will result to fall of investment in home country and thus capital outflow, again the saving over investment line will shift to the right because of which there will be depreciation of real exchange rate and increase in net exports.
Sudden decrease in domestic investment will result in increase in the saving - investment, thus savings over investment line will shift to the right further leading to depreciation of the currency as more currency is available in the market which can be invested abroad, and there will be increase in the net exports from NX1 to NX2 as the real exchange rate depreciates and make the domestic goods more competitive in the foreign market.
A sudden relaxation of trade restrictions will lead to increase in the imports at every exchange rate thus resulting in shift of net exports to the left, which will result in more dollar (domestic currency) to be used to buy foreign goods. But, since this policy does not affect saving and investment, any loss in net exports will be offset by the depreciation of real exchange rate and thus net exports will remain same.
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