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Price Index Increase, Expansionary Policy & Spot Currency Markets

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Are the following statements true or false? Explain.

1. If the general price index in Japan rises faster than that in the United States (assuming that there are zero transaction costs, that no barriers to trade exist, and that products are identical in both countries), we would expect the yen to appreciate with respect to the dollar.
2. Suppose you are a Swiss wine exporter who receives all payments in foreign currency. The French government begins to undertake an expansionary monetary policy If it is certain that the result will be higher inflation in Switzerland than in other countries, you would be wise to use forward markets to protect yourself against future losses resulting from the deterioration of the value of the Swiss franc.
3. If you could accurately estimate differences in relative inflation between two countries over a long period of time (and other participants in the market were unable to do so), you could successfully speculate in spot currency markets.

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Solution Summary

Word document to answer 3 true/false questions on these topics.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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