1) Using Statistics New Zealand's data for the year ended March 2014 (find on the stats.nz website)
a. Complete the following National Accounts table:
- Consumption
- Government Spending
- Domestic Investment
- Exports
- Imports
- GDP (Product Measure)
- Statistical Discrepancy
b. New Zealand's Current account balance for the year ended March 2014 was -6 billion. The (private) financial account balance was $188 million. The net errors and omissions (statistical discrepancy) in the balance of payments was $7.894bn. Find the change in official reserves, and explain what actions the reserve bank took.
c. Suppose the Government finds that a previously unreported transaction took place in January 2014. Specifically, suppose that in January 2014 a New Zealand firm sold and shipped $2.5million worth of goods to a Chinese importer, with payment due in June 2014. How would this affect the Balance of Payments for the year ended March 2014? [hint: the $2.5million accounts receivable can be treated like a loan, a net asset for the exporter]
2) Suppose the demand for British pounds using New Zealand currency is While the supply of British pounds (converting to New Zealand dollars) is [note: P in this case represents the cost of one British pound in terms of New Zealand dollars i.e. NZ$/£, Quantity is in billions of pounds]
a. Find the exchange rate in equilibrium
b. Suppose the New Zealand government wants to maintain a fixed currency, keeping the New Zealand dollar between $1.80 and $1.90. Describe and show on a graph the intervention they would need to undertake to maintain the fixed currency rate. What would the exchange rate be with the minimum government intervention?
c. Suppose that following the popularity of Lorde, British tourism to New Zealand has increased by 50%. Using a graph, explain the effect that this will have on the exchange rate.
3) The annualized interest rate in New Zealand is 3.5% and the annualized interest rate in the USA is 0.5%. The current spot exchange rate is NZ$1.25/US$.
a. Suppose that you call your foreign exchange broker and find that the one year forward contract rate is NZ$1.35/US$.
i. Using the covered differential, determine whether or not there is opportunity for arbitrage
ii. If so, describe the steps you would take and the profits returned by borrowing $1000 (in either currency)
b. The expected spot rate in one year ( is NZ$1.40/US$. suppose that New Zealand decides to increase their official cash rate, increasing the annualized interest rate from 3.5% to 4%. Assuming the expected spot rate in one year remains unchanged, use uncovered interest parity to calculate the effect on the current spot exchange rate.
4) Suppose that interest rates are initially 3% in both New Zealand and USA. Assume that they both have 2% growth and that their monetary velocities remain constant.
The US announces an unexpected round of quantitative easing where they will increase their money supply by 5%. New Zealand is expected to keep their money supply constant.
(a) Find the expected change in the exchange rate over the next year using the monetary approach and purchasing power parity.
(b) In the short run, would we expect the exchange rate (NZ$/US$) to be higher or lower than predicted by the monetary approach? What is this phenomenon called?