ECON 401 Assignment 3, Version C

Prepare a 200–250 word answer for each question, and submit all four responses in one Microsoft Word (or compatible) document.

Question 1: Two countries, Great Britain and Canada, produce just one good: beef. Suppose that the price of beef in the Canada is $2.80 per pound, and in Britain it is £3.70 per pound.

(a) According to PPP theory, what should the $/£ spot exchange rate be?
(b) Suppose the price of beef is expected to rise to $3.10 in Canada, and to £4.65 in Britain. What should be the one year forward $/£ exchange rate?
(c) Given your answers to parts (a) and (b), and given that the current interest rate in the Canada is 10%, what would you expect current interest rate to be in Britain?

Question 2:     (a) Do you think the standard IMF policy prescriptions of tight monetary
policy and reduced government spending are always appropriate for
developing nations experiencing a currency crisis?

(b) Discuss the notion of moral hazard. What is the relationship between moral hazard and the IMF?

Question 3:     (a) What are the main uses of foreign exchange markets for international
business?

(b) What are the differences between a spot exchange rate and a forward
exchange rate?

Question 4: Why was it so important for the IMF and EU to step in to help Ireland in 2010?  What were the potential implications of Ireland’s debt crisis for other EU countries?  How might the crisis have impacted the entire international monetary system?