# ECON 360 Nairobi Meaning of IMF Conditionality Why It Has Been Criticized Questions

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The nominal interest rate in the U.S. is 6% and the nominal interest rate in Canada is 3%. The spot value of the U.S. dollar is 1.1 (\$/Canadian dollar) and the forward rate is 1.3 (\$/Canadian dollar). Calculate the forward discount or premium for the dollar. Does the interest parity condition hold? If not explain what is likely to occur in foreign exchange markets. Assume that interest rates cannot change.

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Econ 360
Spring 2020
Third Midterm
Name___________________________________
1. If the forward rate is greater than the spot rate, what are markets signaling
about their expectations for the future spot rates for the home currency?
2. The nominal interest rate in the U.S. is 6% and the nominal interest rate in
Canada is 3%. The spot value of the U.S. dollar is 1.1 (\$/Canadian dollar)
and the forward rate is 1.3 (\$/Canadian dollar). Calculate the forward
discount or premium for the dollar. Does the interest parity condition hold? If
not explain what is likely to occur in foreign exchange markets. Assume that
interest rates cannot change.
3. Exchange rates are exceedingly difficult to predict. Explain the factors that
determine the exchange rate over the long run, medium run, and short run.
4. According to the following equation (1/R)(1+i*)F = F/R (1+i*). Explain what is the
interest parity condition, and how can we derive the interest parity condition from
the previous equation.
5. If the dollar/pound exchange rate is \$2/£, a Big Mac costs \$5 in New York
City and costs £4 in London. From the point of view of an American
consumer estimate and explain whether the pound is undervalued or
overvalued and indicate in what city U.S. consumers are better off.
6. Explain the three rules that countries must follow to maintain a gold
standard.
7. Why might a group of countries wish to have a common currency? Explain
four reasons.
8. Consider the case of a sudden increase in demand for foreign exchange in
a country with a fixed exchange rate system. Indicate what are the
conditions for the monetary authority to sustain the fixed exchange rate and
explain the mechanism to maintain the exchange rate fixed using a graph.
9. Use a J-curve to illustrate the effect on the current account of an exchange
rate depreciation. Explain why the curve has the shape that it does. What
condition must be fulfilled to have a positive effect of the depreciation of the
currency on the current account?
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10. How does a weak financial sector intensify the problems created by volatile
capital flows?
11. Explain how exchange rate policies affected economies during the Great
Depression.
12. Explain the pros and cons of a crawling peg.
13. Describe the policies that a nation would follow to correct a current account
deficit. What are the primary purposes of each type of policy?
14. Explain why in an economy with fixed exchange rates, monetary policy will
not cause expenditure switching.
15. How did the vulnerabilities in Asian economies lead to the Asian financial
crisis of 1997-1998?
16. Explain the meaning of IMF conditionality and why it has been criticized.
Typed the answer with no reference.