Answer to Question #81826 in Economics for Olayinka

Question

1 Suppose that at a given moment the central Bank of Nigeria begins to worry publicly more than previously about inflation, while the US federal reserve does not but the actual Nigeria Monetary posture does change . what will be the effect, if any of these increase Central Bank of Nigeria concern about inflation on dollar/Naira spot rate?
2 Agree or disagree with the following statement and explain your reason: The theory of relative purchasing power parity (]PPP) can be used to show why the Nigeria Naira is undervalued visa- vis the US dollar?
3 Assume that a group of Nations has an identical inflation rate, with which they are all initially comfortable but in one of them political development suddenly increase the degree of monetary conservation so that CBN aspire to a materially lower inflation rate than before. Will that Central bank be able to achieve the lower inflation rate it now target? On what factors does it’s ability to do so deepen?

Answer 1

1. If the central Bank of Nigeria begins to worry publicly more than previously about inflation, while the US federal reserve does not, then dollar/Naira spot rate will decrease.

2. It is false, because it can be used to show a relationship between the inflation rates of two countries over a specified period and the movement in the exchange rate between their two currencies over the same period, but not the reasons for that.

3. That Central bank won't be able to achieve the lower inflation rate it now target, because it should also such factors as interdependence of the economies of these nations and the amount of international trade between them.