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  • Course
  • Foundations Of Finance
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  • Business University Nyenrode
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  • Disrupting Finance

This assignment consists of 6 different Finance topics. Firstly the simultaneous equilibrium in the US money market and the foreign exchange market is described, followed by the explanations of how how interest rate, money supply, as well as the exchange rates changes when impacted by a recession i...

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  • June 3, 2021
  • 10
  • 2020/2021
  • Case
  • Edward suner
  • A

Subjects

  • finance
  • exchange rate
  • interest rate

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Assignment Finance
Abstract: This assignment consists of 6 different Finance topics. Firstly the simultaneous
equilibrium in the US money market and the foreign exchange market is described,
followed by the explanations of how how interest rate, money supply, as well as the
exchange rates changes when impacted by a recession in the domestic economy, an
increase in the real money supply of the foreign economy, and a decrease in the domestic
interest rate. Later on this assignment analyzed the monthly (end-of.month) 10 years
government bond interest rates for the US and the Norway economy in the period from
March 1987 to March 2021. After that, using Uncovered Interest Parity Condition (UIP)
we calculated the 10 years ahead expected exchange rate. In this case, after conducting a
t-test and estimating a simple regression it is concluded that there is not a good
relationship between the expected exchange rate and spot exchange rate of USD/NOK
because the expected exchange rate does not go one-to-one with the actual exchange rate
as there are huge differences between them.
In the last part it is discussed how the Federal Reserve may achieve a depreciation of the
US dollars against the foreign currency when the US policy rates and the foreign
economy reached the zero-lower bond (ZLB).

, EXERCISE A
Using charts and your own words explain the simultaneous equilibrium in the US money
market and the foreign exchange market.




Figure 1. Simultaneous Equilibrium in the U.S. Money Market and the Foreign Exchange Market



On the right side of Figure 1 is presented the Money Market. The values that determine the
supply of money in the money market are the nominal money supply (MS). and the price level
(P$). While the values that determine the demand for money include the national income (Y) or
in other words the GDP, and the short-term interest rate (R). The equilibrium between the money
demand and supply indicates the equilibrium value of the interest rate, which is set by the central
bank. On the left side of Figure 1 is presented the Forex Market. It includes the domestic and
foreign rates of return which both have an impact on the equilibrium value of the exchange rate.

In Figure.1 is presented the simultaneous equilibrium in the US Money Market and the Foreign
exchange market, which in our case is the Norwegian Market, that is a combination of both the
rotated Forex-Market diagram together with the Money Market diagram. The intersection of the
money demand curve with the money supply curve in money market gives the equilibrium
interest rate, which due to UIP ( Uncovered Interest Parity) it goes to the FR curve (expected
return on the foreign deposits) and figure out what the exchange rate should be in the
equilibrium.

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