Economic Assignment

1. Analyze the dynamics of the U.S. current account data (U.S. exports and imports of

goods, services and unilateral transfers) over the past ten years. Use the Bureau of

Economic Analysis website http://www.bea.gov/international/index.htm . What have

been the major factors contributing to the increase in U.S. exports over the past 10 years?

What have been the main factors contributing to the increase in U.S. imports?

2. Explain the Purchasing Power Parity theory of exchange rate determination, both its

absolute and its relative form. From the Federal Reserve Bank of St. Louis FRED

database, download the monthly data series of: the Canadian Dollar (CAD) value of

USD, the changes from a year ago series of U.S. CPI and the Canadian CPI - all since

January 1980 till January 2013. Copy the data graphs to your answer pages and discuss

whether the USD value in CAD exchange rate has followed the Canadian vs. U.S.

inflation differential over the past 30 years.

3. Examine the newest (Feb 2, 2013) Big Mac Index published by The Economist

magazine. The index data are available on Blackboard in this course “Content” section.

Identify three countries with undervalued currencies against the USD and three countries

with overvalued currencies. What are possible reasons for the under- and the overvaluation of each of these countries’ currencies?

4. The spot rate of the GBP in USD terms was 1.5116 and the three-month forward rate was

1.5108 on March 15, 2013. Calculate the annualized forward premium (or discount) of

the GBP in USD terms. Briefly explain what economic factors decide about the obtained

forward premium (or discount).

5. (a) Explain what is the effect on the exchange rate of an increase in the country’s money

supply according to the asset market or portfolio approach.

(b) In what ways does it differ from the monetary approach?

(c) Do empirical tests support or reject the monetary and asset market or portfolio approaches?