Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 193
Chapter 17
ANSWERS TO QUESTIONS
1. Suppose that you are considering going on vacation abroad and that the euro has
appreciated by 15% with respect to the U.S. dollar. Would you be more or less
willing to visit Rome and Paris?
2. “A country is always worse off when its currency is weak (falls in value).” Is this statement
true, false, or uncertain? Explain your answer.
3. When the U.S. dollar depreciates, what happens to exports and imports in the United States?
4. If the Japanese price level rises by 5% relative to the price level in the United States, what
does the theory of purchasing power parity predict will happen to the value of the Japanese
yen in terms of dollars?
5. If the demand for a country’s exports falls at the same time that tariffs on imports are raised,
will the country’s currency tend to appreciate or depreciate in the long run?
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 199
ANSWERS TO DATA ANALYSIS PROBLEMS
1. Go to the St. Louis Federal Reserve FRED database and find data on the exchange rate of
U.S. dollars per British pound (DEXUSUK). A Mini Cooper can be purchased in London,
England, for £17,865 or in Boston, United States, for $23,495.
a. Use the most recent exchange rate available to calculate the real exchange rate of the
London Mini per Boston Mini.
b. Based on your answer to part (a), are Mini Coopers relatively more expensive in Boston
or in London?
c. What price in British pounds would make the Mini Cooper equally expensive in both
locations, all else being equal?
2. Go to the St. Louis Federal Reserve FRED database and find data on the daily dollar
exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen
(DEXJPUS). Also find data on the daily three-month London Interbank Offer Rate, or
LIBOR, for the United States dollar (USD3M-TD156N), euro (EUR3MTD156N), British
pound (GBP3MTD156N), and Japanese yen ( JPY3M-TD156N). LIBOR is a measure of
interest rates denominated in each country’s respective currency.
USD LIBOR
EUR LIBOR
GBP LIBOR
JPY LIBOR
25-Jul-17
1.31667
−0.37286
0.28681
−0.00807
25-Jul-16
0.73350
−0.30357
0.52350
−0.03343
USD-EUR LIBOR
USD – GBP
LIBOR
USD – JPY
LIBOR
25-Jul-17
1.68953
1.02986
1.32474
25-Jul-16
1.03707
0.21000
0.76693
One Year Change
0.65246
0.81986
0.55781
USD per EUR
USD per GBP
JPY per USD
25-Jul-17
1.1656
1.3046
111.57
25-Jul-16
1.0980
1.3130
106.02
EUR appreciated
GBP depreciated
JPY
depreciated
Mishkin • Instructor’s Manual for The Economics of Money, Banking, and Financial Markets, Twelfth Edition 200
a. Calculate the difference between the LIBOR rate in the United States and the LIBOR
rates in the three other countries using the data from one year ago and the most recent
data available.
b. Based on the changes in interest rate differentials, do you expect the dollar to depreciate
or appreciate against the other currencies?
c. Report the percentage change in the exchange rates over the past year. Are the results
you predicted in part (b) consistent with the actual exchange rate behavior?