Economics-Foreign Exchange Paper

NOTES FOR THE SECOND INTERNATIONAL ECONOMICS PAPER

The purpose of the second paper is to describe and analyze the foreign exchange situation of your country. The task of the paper is to combine foreign exchange rate data, research material (journal articles, newspaper reports, business periodicals) and course material to describe the fluctuations in your country’s currency. The challenge is to craft a plausible rationale to explain increases and decreases in the value of your currency. The paper should be a minimum of 6 pages.

For individuals whose country uses the Euro, describe the process that the country took when transitioning to the Euro. How did the country establish the conversion rate and what difficulties did they have maintaining that rate? In addition, focus on how your country may have influenced the value of the Euro after 2002.

Here is a checklist of items which should be included:

· Define the exchange rate regime: fixed, flexible or managed float

· Twenty years of data on the value of the currency—you may define your currency in relation to dollars, or Euros or a trade weighted index

· Graph the value of the currency overtime

· Identify and describe a pattern in the value

· Analyze the changes in the value by looking at the following explanatory variables

· Balance of trade

· Real interest rates

· Rate of growth of GDP

· Prices and inflation

· Store of wealth

· Expectations about the price of FX

· Productivity

· Trade Barriers

· Big Mac Index

· Domestic money supply

· Political considerations

· Stability issues

· Identify at least two inflection points and analyze what happened and illustrate the changes in the value of the currency with the Foreign Currency Supply and Demand Model

· Identify the single most influential variable that explains changes in the value your country’s currency

· Conclusion