Jovania AndradePrinciples of Macroeconomic Nurul Aman FinalExam 2) 1year later GBP / USD = 1.55Interest Rate in England = 2%100,000,000 * 1.68 = 168,000,000! year return = 168,000,000 * 1.
02 =171360000USD conversion after 1 year = 171360000 /1.55 = 110554838.71Return on Investment = 110554838.71 /100,000,000= 1.1055( 1.1055 – 1 ) * 100 = 10.55%Return on investment is 10.55%B) CFO must have expected GBP toappreciate as there is a difference in interest rates.
Interest rate paritystates that the difference in interest rates will be equal to forward and spotexchange rate.( 1.02 / 1.005 ) = 1.
01492This turns out to be 1.5% roughly.Now we should plus this into exchange ratedifferential1.68 / 1.01492 = 1.6553Expected GBP / USD rate was 1.
6553 3) The time referenced above, the 2008financial crisis situation, is a phase of financial crisis where the situationof depression took over the economy so that business runs into a completedownfall. Within this time period, the economy faces all the depression relatedfactors such as low-income level, high unemployment, high inflation level, lowsavings and so low investment level etc. Periodically it is needed to increasethe money funding in result to increase the investment in the economy.
This isbecause, according to the Keynesian theory, the increase in investment levelwill increase the national income and the rate of employment in order toincrease the aggregate demand to draw a trajectory of pulling the economy outof this depressionary situation. The traditional open market operation ofpurchasing the Treasury bills is a slow process, where the money supply in theeconomy increases in a step-wise manner. But the time we are looking into andanalyzing needed a much rapid expansion of money supply and so the Fed decidedto go out of their comfort zone, from 2008-2009, to adopt the expansionarydirect lending policy to increase the fund needed to expand the investment inthe economy. In doing so, led the aggregate demand to rise and helps pullingthe economy out of the dangerous situation.4) Banks are being flooded with deposits dueto various measures that were taken. On the surface, two repercussions appearto be evidently present: one is that it may be a signal that despite all theactions, the Fed has been unable to raise the demand for liquidity, and thesecond is the increase in the deposit may fuel inflation. Although the repercussionsare a probability that may take place, there are some other aspects that needto be need to be considered. As a consequence of increased deposits with thebanks, the lenders may want to decrease the rate of interest which effectivelyis releasing more money into the system and into the hands of the generalpublic.
This in turn raises the buying power of the individual, increasing thedemand for goods and services. In case the produce of goods and services areshort of the demand, this may give ruse to inflationary pressures. A clear andwell thought out strategy here shall be the catalyst for other aspects of theeconomy as well like employment levels etc.5) Given the current condition of the USeconomy, we believe that the US policy makers would prefer to see the USD todecline in value. A strong dollar makes US goods expensive so that net exportsfall which implies trade deficit and worsening of balance of payment. When theUS dollar makes domestic producers losing money in reduced exports, domesticfirms might locate themselves out in other nations so there will be a job lossas well. In terms of AD-AS, this implies a reduction in net exports and so ADshifts left, reducing price and RGDP.
A weak dollar makes US goods cheaper sothat net exports rise which implies trade surplus and improvement in balance ofpayment. When the US dollar makes domestic producers earning more money byincreasing exports, domestic firms might expand while for domestic consumers, aweak USD implies expensive foreign goods in terms of imports. In terms ofAD-AS, this implies a rise in net exports and so AD shifts right, increasingprice and RGDP. 6) 1-year US treasury securities yield = 0.28%2-year US treasury securities yield = 0.69%Expectations of 1-year yields, 1 year from now is calculationbelow using expectation theory1-year yields, 1 year from now = (1+ 0.69%) ^2 / 1+ 0.028% – 1 =(1.
013847 / 1.0028) – 1 = 1.10%Hence, Expectations of 1-year yields, 1 year from now is 1.10% 7) A Balanced Budget Amendment is highlyill-advised to address the nation’s long-term fiscal problems. The argumentagainst is that it would cause economic harm and raise a host of problems forsocial security and other federal vital functions, which would result in someserious risks rising such as capping weak economies into recession, and makingit longer and deeper.
Instead of allowing the automatic stabilizers like lowtax collection and other benefits to cushion an economy, the amendment wouldforce policyholders to reduce spending and increase tax or both. This willweaken the economy and would lead to higher deficits.B) Not alldeficit budgets are bad, in fact recent deficits accelerated recovery from therecession, but long-term deficits of the present magnitude are harmful. Thiswould increase indebtedness to foreigners which is risky and expensive. Todaythe United States is the second largest net debtor in the world.
If foreignerslose confidence, their investment in the country would diminish bringing downthe value of dollars, and raise the prices for imported goods. Ultimately, thiscould increase interest rates and also lead to a further financial crisis.