Jim and Wendy Case Study - Foreign Currency - Finance Assignment Help

Assignment Task :

Question 1:

1A: Suppose that country X uses XXX as a currency and country Y uses YYY as a currency. Suppose that the nominal exchange rate as of yet is XXX/YYY = 25. Mention all the conclusions that you may draw from that nominal exchange rate. 

1B: Suppose that 1 year from now, the nominal exchange rate has changed to XXX/YYY = 30. The price levels in country X have risen by 10% and in country Y with 10% too. Mentions all the conclusions that you may draw from the new real exchange rate. 

Jim and Wendy are from the US and are engaged in a conversation. They want to go to vacation to Venezuela, a country where there is both a formal currency market and an informal (or black) currency market. Jim says that it is better to exchange their USD at the black market once they arrive in Venezuela. Wendy says that they get a better deal if they exchange their USD for Venezuelan currency in the US, before they get on the plane. 

1C: Who do you support, Jim or Wendy? Explain. 

1D: Why do countries like Venezuela have black markets for foreign currency? 

1E: Venezuela has a fixed exchange rate with the USD. Jim says that this is a good thing and that the US should also have fixed exchange rates with all countries. Wendy says: “Don’t be ridiculous. It’s not always a good thing.” With your knowledge, comment on them. 

Question 2:

2A: What is the difference between deflation and disinflation?

2B: Which countries would have the most to fear from deflation? Explain.

2C: What is stagflation?

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