1. Using Statistics New Zealand's data for the year ended March 2015 (find on the stats.nz website) and exchange rate data over the same period (find onoanda)

a. Determine whether any change in the NZ$/US$ exchange rate over the quarter was matched by an equivalent change in prices (the US consumer price index declined by 0.1%)

b. Would we expect purchasing power parity to hold in the annual data? Why or why not?

2. According to a May 11th 2015 article on interest.co.nz "ANZ economists now expect the RBNZ to cut official interest rates in June followed by another drop in July". Assume that the ANZ economists' expectations are consistent with expectations across the financial sector.

If RBNZ announces in June that they will not be changing the interest rate, what is the expected effect on the spot rate when they make the announcement? Use the asset market approach and show the effect on a graph.

3. Suppose the demand for British pounds using New Zealand currency is Q^d=1000-250P While the supply of British pounds (converting to New Zealand dollars) is Q^s=500P-1000

[note: P in this case represents the cost of one British pound in terms of New Zealand dollars i.e. NZ$/£, Quantity is in billions of pounds]

a. Find the exchange rate in equilibrium

b. Suppose the British government wants to maintain a fixed currency, keeping the British pound between NZ$1.80 and NZ$1.90 per pound. Describe and show on a graph the intervention they would need to undertake in terms of buying or selling pounds to maintain the fixed currency rate. What would the exchange rate be with the minimum government intervention?

4. The annualized interest rate in New Zealand is 2.75% and the annualized interest rate in the Eurozone is 0.25%. The current spot exchange rate is NZ$2/Euro.

Suppose that you call your foreign exchange broker and find that the one year forward contract rate is NZ$1.9/Euro.

Using the covered differential, determine whether or not there is opportunity for arbitrage

If so, describe the steps you would take and the profits returned by borrowing $1000 (in either currency)

5. Suppose that New Zealand has 4% expected growth and Indonesia has 5% expected gdp growth over the next year and that their monetary velocities will remain constant.

New Zealand announces an unexpected round of quantitative easing under which they will increase their money supply by 2%. Indonesia is expected to keep their money supply constant.

Find the expected change in the exchange rate over the next year using the monetary approach and purchasing power parity.

In the short run, would we expect the exchange rate to be higher or lower than predicted by the monetary approach? What is this phenomenon called?