International Financial Management INSTRUCTIONS 1. The exam period is 4 hours, from 6:00 to 10:00 pm. You must submit your exam through Email by 10:10 pm on June 28, 2022. 2. This exam contains 6 questions, each worth 10 marks. 3. For short-answer questions, provide your answers and explanations. For numerical questions, it is important to show your work. You will receive substantial credit for correct analysis, even if your answer is arithmetically wrong. 4. You must show your work clearly. You can either handwrite your work, then scan it and save it as a PDF file or you can type your work in a MS word document. No other formats are acceptable. DO NOT insert Excel work in your exam. Marks are NOT given to illegible answers. 5. The file name should be in the form of "your last name + first name+ student number." On the first page of the exam, you should also clearly indicate your name and your student number. 6. It is important that the submitted work is your own and adheres to all your Academic Rights and Responsibilities as outlined in the Student Code of Conduct. 1
Question 1. On Wednesday June 15, 2022, The U.S. Federal Reserve raised its benchmark interest rate by three-quarters of a percentage point in an attempt to temper record inflation - the biggest hike since 1994. That follows a quarter-point increase in March and a half-point jump in May. (a) If the exchange rate value of the dollar remains steady, what are the effects of this interest rate hike on the U.S. national product and income? What are the possible effects on the U.S. unemployment rate? Explain. The theory is that by increasing the interest rate, the U.S. Federal Reserves keeps inflation in check. But this has some effects on the US GNP, Income, and unemployment rates. For businesses, the cost of capital that is needed to produce more goods and services increase as it becomes more expensive to borrow money. With the hike of the interest rates, consumers and businesses are encouraged to save more rather than spend thereby reducing the value of all finished goods and services owned by the U.S citizens. As a result, there is a reduction in the demand for goods and services which prompts businesses in the U.S to cut back on production thereby laying off workers which increases the unemployment rate. (b) Following the interest hike, what is the likely pressure on the exchange rate value of the US dollar? Explain. The hike of the U.S interest rate makes foreign investment lucrative in the U.S Economy. This prompt many Foreign Investors to invest their money in the U.S economy for the hope of a higher return on their investments. Therefore, the Value of the U.S dollar will appreciate as there is a rise in demand for the dollar. (c) What are the implications of the change in the exchange rate value of the dollar for US national product and unemployment? If