Jeopardy

1
JEOPARDY
2
JEOPARDY
Arbitrage This!!
Facts Figures
Credits Debits
Model Behavior
Potpourri
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Final Jeopardy
3
100 Arbitrage This!!
PPP implies that if inflation in the US is 4
while inflation in Europe is 2, this should
happen.
The dollar should depreciate by 2 against the
Euro.
Return to Board
4
200 Arbitrage This!!
Suppose that the dollar is expected to
depreciate. UIP suggests that this should happen
to US interest rates
They should increase by the expected percentage
change in the exchange rate
Return to Board
5
300 Arbitrage This!!
UIP combined with PPP suggests this about
inflation adjusted interest rates.
Real (inflation adjusted) interest rates should
be equalized across countries.
Return to Board
6
400 Arbitrage This!!
Consider the following exchange rates
EUR/USD 1.50 JPY/USD .001 JPY/EUR E
.002
You could make money by doing this.
Use Yen to buy Euros (the Euro is undervalued),
use Euros to buy (the Euro is overvalued
relative to )
Return to Board
7
500 Arbitrage This!!
Suppose that Americans spend 80 of their income
on services while Europeans spend 50 on
services. A 10 worldwide increase in the cost
of services would do this
The US would experience a real appreciation of 3
against the Euro
Return to Board
8
500 Arbitrage This!!

• For Simplicity, assume that all prices are
  initially 1.

The following year we have the following.
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9
Facts Figures 100
For most of the modern era, international
financial markets have operated under this
standard
The Gold Standard
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10
Facts Figures 200
Trade in these garage sale assets dominates
currency markets
Swaps
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11
Facts Figures 300
2 Billion dollars per day is roughly the size of
this
US Trade Deficit
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12
Facts Figures 400
This pair of financial economists revolutionized
the field of option pricing
Fischer Black and Myron Scholes
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13
Facts Figures 500
The Euro is currently selling for 1.28. If
Eurozone interest rates are 4 while US interest
rates are 3, this should be the price of a 1
year Euro forward contract
1.267
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14
Credits and Debits 100
US investors currently hold over 1T in foreign
investments. Interest paid on these assets would
show up as this in the current account
A credit () in Net Factor Payments (Income
earned abroad)
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15
Credits and Debits 200
A positive entry in the financial account refers
to this
Capital Inflow
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16
Credits Debits 300
There has been talk of the Fed stepping in to
increase the value of the dollar. This
transaction would be recorded in this section of
the BOP
US Official Reserve Assets
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17
Daily Double
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18
Daily Double Debits Credits
An American MNC acquires a foreign subsidiary.
This transaction would look like this in the BOP
(Two entries)
() Foreign Acquisition of US Private Assets (-)
FDI
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19
Credits and Debits 500
US Aid to developing countries shows up like this
in the BOP
A debit (-) in Net Unilateral Transfers
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20
Model Behavior 100
In the monetary model with flexible prices, this
market takes center stage.
Money Market (Commodity Market)
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21
Model Behavior 200
The portfolio balance model can be distinguished
from other exchange rate models by this unique
feature
PPP and UIP do not hold
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22
Model Behavior 300
A 10 contraction of the US money supply would
result in this if commodity prices are fully
flexible
A 10 dollar appreciation
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23
Model Behavior 400
If commodity prices are fixed and capital is
perfectly mobile, a 5 increase in the US money
supply would cause this in the short run.
A depreciation (both real and nominal) of more
than 5
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24
Model Behavior 500
Currency prices tend to be extremely volatile.
According to the monetary approach with flexible
prices, this volatility is a result of this
Relative price changes
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25
Potpourri 100
This name could refer to an economic curve
describing the relationship between exchange
rates and trade balances or the sidekick to a
pudgy, silent, stoner
Jay
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26
Potpourri 200
A Nobel Laureate was the topic of this 2001
Oscar winner
A Beautiful Mind
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27
Potpourri 300
If trade balances are all that matter for
currency prices, then this is the source of
volatility in currency markets
Low demand/supply elasticity
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28
Potpourri 400
If the elasticity of imports for the US is 3,
this would need to happen to generate a 10
decline in US import expenditures.
A 5 nominal depreciation
Return to Board
29
Potpourri 500
The necessary conditions for the J-Curve were
developed by this pair of economists
Marshall and Lerner
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30
Final Jeopardy
31
Final Jeopardy
Any general equilibrium model of exchange rates
should contain interactions between these five
markets
32
Final Jeopardy
Home money market Foreign money market Home bond
market Foreign bond market Currency market