Question 1
Consider the following two figures from the Wall Street Journal. They report the change in the price of one euro in terms of US dollars in the minutes following announcements on the interest rate policy of the European Central Bank (ECB). For all questions, just focus on the yellow/orange lines, and ignore the red line.
a. Consider the yellow/orange line in the left figure. What was the likely policy decision of the ECB on 9/4/2014 about interest rates? Please highlight one:
A larger than expected increase A larger than expected decrease
. Please explain in up to three lines.
c. What is the likely consequence of the developments described by the yellow/orange line in the left figure on the ability of U.S. exporters to sell to European customers in the short run? Please highlight one:
Exports are easier Exports are harder
d. Please explain in up to three lines.
e. Consider the yellow/orange line in the right figure. On 12/3/2015, the ECB cuts the deposit rate by 0.1 percentage point and extends QE through March 2017. Which considerations might have led the ECB to adopt the interest rate cut? Please highlight one:
XXXXXXXXXXA more negative A less negative
output gap in the Eurozone output gap in the Eurozone
f. Please explain in up to three lines.
g. Consider again the yellow/orange line in the right figure, and the announcement described in part e. What can we say about the expectations of market operators in the days and minutes before the announcement? Please highlight one:
Operators expected a larger cut Operators expected a smaller cut
h. Please explain in up to three lines.