ECS2602 - ASSIGNMENT 4 - S2 - 2016.

ECS2602 - ASSIGNMENT 4 - S2 - 2016.100% CORRECT questions, answers, workings and explanations. This assignment contributes 40% towards your semester mark. Please ensure that this assignment reaches the university before the due date. Answer all questions on a mark-reading sheet. 1. Which of the following statements are correct? a. The nominal exchange rate is the relative price of domestic goods in terms of foreign goods. b. The real exchange rate is the price of the domestic currency in terms of foreign currency. c. The most popular way of measuring the openness of the goods market, is to express the imports and exports as a percentage of GDP. d. Openness in goods markets is the ability of consumers and firms to choose between domestic goods and foreign goods. e. Openness in financial markets is the ability of financial investors to choose between domestic financial assets and foreign financial assets. 1. a, b, c, d and e 2. Only a and b 3. Only b, c and d 4. Only a, b and e 5. Only c, d and e The correct option is 5. Statements c, d and e are correct. See the study guide (MO001), learning unit 5. Statement a is incorrect. The nominal exchange rate is the price of domestic currency in terms of foreign currency. Statement b is incorrect. The real exchange rate is the relative price of domestic goods in terms of foreign goods. 2. Which of the following refers to an appreciation of the rand? a. R1 = $0.30 to R1 = $0.25 b. R1 = $0.25 to R1 = $0.30 c. R1 = $0.50 to R1 = $0.55 d. $1 = R8 to $1 = R7 e. $1 = R7 to $1 = R8 1. a and c 2. Only b and c 3. a and e 4. b, c and d 5. b and e The correct option is 4. See section 5.1 of the study guide. Note that there are two ways in which the nominal exchange rate can be defined: Price of foreign currency in terms of the domestic currency ($1 = R) – Direct method, for instance, $1 = R8.6734 and this is the common practice in South Africa. This is the rate you see on the television news, hear on the radio and read about in the newspapers. The other way is to express it as the price of the domestic currency in terms of foreign currency (e.g. R1 = $). This means that the price of the rand (the domestic currency) is expressed in terms of dollars, pounds, euros, and so forth – Indirect method, for instance, R1 = $0.20. In this module, we follow this international convention of defining the nominal exchange rate. All the statements refer to the section regarding nominal exchange rates. Statement a is incorrect. This is an example of a depreciation in the nominal exchange rate because the rand (the domestic currency) is worth less in terms of dollars than before. Statement e is also incorrect and is an example of a depreciation of the rand because more rands are now needed to buy a dollar. Statements b, c and d are correct. These are examples of an appreciation in the nominal exchange rate.