Chapter 13. Chapter 13

Data Exercises
Chapter 13
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Many of the items we buy in the United States are produced in other countries. As such, the price we pay depends on the exchange rate between the two countries. Suppose you want to buy something made in Mexico. What features of exchange rates do we need to understand? Will the currency appreciate or depreciate? Use the FRED Economic Data, provided by the Federal Reserve Bank of St. Louis, to explore these questions. Go to Federal Reserve Economic Data to access the full dataset.

The source of the data is FRED Economic Data provided by the Federal Reserve Bank of St. Louis, and they are available Federal Reserve Economic Data .

To access the data:

1. Go to Federal Reserve Economic Data and enter “Monthly exchange rate” into the search field.

2. Select the boxes next to Mexico, Brazil, and the U.K.

3. Select “Add to graph.”

4. Select the “10Y” option above the graph. The graph will change to show the last 10 years’ worth of monthly data.

Question

a. Fill in the table based on the data. From August 2008 to March 2009, how did the value of the U.S. dollar change relative to the other currencies? (Hint: Note that the U.S.–U.K. exchange rate in the data is given as US/UK)

If you hover the cursor over one of the lines, it will give you the date and currency values for all three countries. Move the cursor left or right on a line to change the date.
Country (currency) August 2008 (per $) March 2009 (per $) Percentage Change (round to nearest %) Appreciated or Depreciated?
Brazil (real) BTdwrVgzHOfVSj6syUnsX69YsJdFcV3oVLok1NGNHmr7MPWJZSJDZO2OYx9agKoQvAhPAJd20PYp4qKYu+FRmH6hKG9nfryquhRZpL4slmp0SJdkqGOrTbT57FY= Ula0DdJOLqIF7zT25Ci9ZhfjGnnzSxQjBK7ZLLmbK7dmsbPV//RrC0wbCS6jr0UMBmqhT4cg2Sd2KtLgBcJgqa/a8eQMBYMmNDcEEFGEQlGXBvK+9Dhz2qz5AMQ= dlowlw3tzFEXprcV+PkJwfk47q/2KPyTBrWbM+q1DOwW9fLVga93rUyjnsDaqWu8GjMSax/bea6JinITNkzzcnymxDi//9+XwiQ0Yli031A= z0Y8Wm32oUu+OvQOEu2yvm4pWLE2qXgVPaczKQ==
United Kingdom (pound) RAYc+MwHtABkEdBSmpzYqjhxOnvvFx5q9d9g0C48ZYgI0KzKyDM5sevQvcDmTQxG5S1tJd2s4ttDua12omD0IB1B2X6dx2TvZz+vN835gqDKBwDPZggNg3IjnkU= 0vod+HG2QdPC8EtIvw/9iwY4kFbCW1XXXl+ptsh1JHVwTtuLRHECxvmqBK7JzG+QMX4E3866nV2WdrveJ5kZLCxspvWmTr0J4c/TMPhihz8PFkHbKQdWOA== sKhL/Ok4OpGp11iASPZYP1tYBMk1hgJ0RsisKFaeX/dkCpYWv8m7Mni/rFB50B/T6Pr1w41XSLYK53VkUTDvmY2su1vE7mPzfkQGqHKEqjw= z0Y8Wm32oUu+OvQOEu2yvm4pWLE2qXgVPaczKQ==
Mexico (new peso) QZq03qkt46cjQ3tEyQQUi1cVdw9M6U+i7C7LuG5mBnjfQNcUzjccsA9+sHKo+7LyzacS87xYVhnwNAqXEIt7YIzVYnjxZ40aZ07zOK4MK8KNjZqWR7HhEQ9sVBs= WeAw6h4Ce7AsZbKGuW4RjHKfoq0RACoPPMgqEOUJVqh/+rxoge56Hp1IhLEcm2SGT95oXeVWJHySexr45FoDN5SLtbhzAULZe3AE7N9VEleG/m0KPITVR+5b1cc= 7sdAT53hyM5YFC1iLQB21vT2jbiWzp1XjZB/Oh3HeksxqqVPWIOqLBH6xWbqT8esHQL55FerPsNMi8Tq/QJH4gKIducPntqY+RhZHq9s4XU= z0Y8Wm32oUu+OvQOEu2yvm4pWLE2qXgVPaczKQ==

Question 13.1

When the dollar appreciates relative to another currency, it can buy more units of that currency. For example, in August 2008, one dollar could buy 10.1154 new pesos, but in March 2009, one dollar could buy 13.6955 new pesos. Since the same dollar can buy more new pesos, we need fewer dollars overall to buy Mexican goods.
How many units of the foreign currency will you get per dollar before and after the change in the exchange rate?
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Data Exercises
Chapter 13
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Now let’s explore how arbitrage works using the same countries.

Question 13.2

If you buy $1 worth of Brazilian reals, you will have 3 Brazilian reals. You then turn the 3 Brazilian reals into British pounds at the rate of 1 to 1, or 3 British pounds. This equates to trading $1 for 3 British pounds. If you were to buy British pounds directly, you would only receive 0.5 pounds for each dollar.
Recall that this would be a situation of triangular arbitrage, in which currency A is traded for currency C indirectly through currency B.
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Question 13.3

Since 1 dollar equals 0.5 pounds, it would take $20,000 to equal 10,000 pounds ($20000 × 0.5 = 10,000 pounds).
Consider how many dollars it would take to acquire the necessary number of pounds to be able to buy the car.
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Question 13.4

More dollars will be supplied to the foreign exchange market relative to reals, thereby causing the real to appreciate relative to the dollar. At the same time, more reals will be supplied to the market relative to the pound, so the real will depreciate relative to the pound. Given that initially 1 British pound = 1 Brazilian real, 1 U.S. dollar = 3 Brazilian real, and 1 U.S. dollar = 0.5 British pounds, the 1 U.S. dollar = 3 Brazilian real rate will fall, with 1 U.S. dollar buying fewer reals, and the 1 British pound = 1 Brazilian real will rise, with 1 pound buying more reals.
Within a basic supply and demand framework, consider what would happen to the price of a commodity when either its supply increases or its demand increases.
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