Arbitrage This!! Facts & Figures Credits & Debits Model Behavior Potpourri $100 $200 $300 $400 $500 $100 $200 $300 $400 $500 Final Jeopardy

$100 Arbitrage This!! PPP implies that if inflation in the US is 4% while inflation in Europe is 2%, this should happen. Return to Board The dollar should depreciate by 2% against the Euro.

$200 Arbitrage This!! Return to Board 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

$300 Arbitrage This!! Return to Board UIP combined with PPP suggests this about inflation adjusted interest rates. Real (inflation adjusted) interest rates should be equalized across countries.

$400 Arbitrage This!! Return to Board 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 $)

$500 Arbitrage This!! Return to Board 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

For Simplicity, assume that all prices are initially 1. The following year we have the following. $500 Arbitrage This!! Return to Board

Facts & Figures $100 Return to Board For most of the modern era, international financial markets have operated under this standard The Gold Standard

Facts & Figures $200 Return to Board Trade in these “garage sale” assets dominates currency markets Swaps

Facts & Figures $300 Return to Board $2 Billion dollars per day is roughly the size of this US Trade Deficit

Facts & Figures $400 Return to Board This pair of financial economists revolutionized the field of option pricing Fischer Black and Myron Scholes

Facts & Figures $500 Return to Board 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

Credits and Debits $100 Return to Board 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)

Credits and Debits $200 Return to Board A positive entry in the financial account refers to this Capital Inflow

Credits & Debits $300 Return to Board 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

Return to Board

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 Daily Double: Debits & Credits

Credits and Debits $500 Return to Board US Aid to developing countries shows up like this in the BOP A debit (-) in Net Unilateral Transfers

Model Behavior $100 Return to Board In the monetary model with flexible prices, this market takes center stage. Money Market (Commodity Market)

Model Behavior $200 Return to Board The portfolio balance model can be distinguished from other exchange rate models by this unique feature PPP and UIP do not hold

Model Behavior $300 Return to Board A 10% contraction of the US money supply would result in this if commodity prices are fully flexible A 10% dollar appreciation

Model Behavior $400 Return to Board 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%

Model Behavior $500 Return to Board 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

Potpourri $100 Return to Board 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

Potpourri $200 Return to Board A Nobel Laureate was the topic of this 2001 Oscar winner A Beautiful Mind

Potpourri $300 Return to Board If trade balances are all that matter for currency prices, then this is the source of volatility in currency markets Low demand/supply elasticity

Potpourri $400 Return to Board 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

Potpourri $500 Return to Board The necessary conditions for the J-Curve were developed by this pair of economists Marshall and Lerner

Any general equilibrium model of exchange rates should contain interactions between these five markets

Final Jeopardy Home money market Foreign money market Home bond market Foreign bond market Currency market