Problem Set 3: Exchange Rate and Exchange Rate Regime

A. THEORY (no need to submit)

- Nominal appreciation/depreciation, real appreciation/depreciation, real undervalued/
overvalued, and the relationship between exchange rate and international trade competitiveness.
- Supply and demand for foreign currencies and their determinants.
- Definition and characteristics of exchange rate regimes.
- Direct intervention of the Central Bank on foreign exchange market: sterilized and non-
sterilized.
- Currency devaluation and revaluation
- Foreign exchange regulation measures
B. EXERCISES (must submit)
Type I. Short question
Question 1: Calculate the percentage of appreciation and depreciation of currencies if the
information is as follows:
Free market rate: USD / VND = 22,670
State Bank: USD / VND = 22,497
Question 2: Calculating the rate of devaluation and revaluation of currencies if the State Bank of
Vietnam adjusted the official rate from 22,505 to 22,650?
Question 3: Calculate the percentage of real overvalued and undervalued currencies if the
information is as follows: USD/CNY= 6,7268. The “standard basket of goods” in the US and
China are 1,000 USD and 5,000 CNY, respectively. Commenting on the position of international
trade competitiveness between the two countries?
Question 4: Calculate the real exchange rate in the dynamic state if you know the following
information: USD / VND exchange rate at the beginning of the year is 22,626 and the end of the
year is 22,800. Yearly inflation of USD and VND was 2% and 9.5% respectively. Comment on
the change of international trade competitiveness between the two countries?

Type 2: Long question

Question 5: Suppose that USD supply and demand are expressed by the following functions:
QD = 250,000 - 3E; QS = 95,139 + 4E
In which: QD quantity demanded USD, QS quantity supplied USD, E exchange rate USD/VND.
a) Assuming that Vietnam and the US maintain the floating exchange rate regime. How much is
the balance rate? What is the amount of USD traded on FX?
b) Assuming that Vietnam maintains a fixed exchange rate regime at E (USD/VND) = 21,950.
Calculate the percentage of overvaluation/undervaluation of USD and VND. How does
maintaining this exchange rate affect Vietnam?

Question 6: Suppose that the supply and demand of AUD are expressed by the following
functions:
QD = 20 - 8E; QS = 11.5 + 4E
In which: QD quantity AUD demand; QS supply quantity AUD; E exchange rate AUD/USD.
a) Under floating exchange rate regime, suppose that the Reserve Bank of Australia decides to
intervene by selling 1.5 AUD on the foreign exchange market. Determine the balance rate and
the amount of the transaction? Illustrating by graph?
b) Suppose that the US and Australia maintain a fixed exchange rate regime at AUD = 0.7100.
How much will the foreign reserves of Australia increase or decrease if the Reserve Bank of
Australia is responsible for intervening in the foreign exchange market? Please explain why and
describe it graphically?