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International Econ Exam 1 Solutions
International Econ Exam 1 Solutions
International Econ Exam 1 Solutions
Econ 457
Spring 2011
Name:
UID:
C
)
earnings of Spanish factory counts in Spain's GNP but are part of Britain's GDP.
D
)
earnings of Spanish factory counts in Spain's GDP but are part of Britain's GNP.
E
)
None of the above.
3)
In open economies,
A
)
saving and investment are necessarily equal.
B
)
as in a closed economy, saving and investment are not necessarily equal.
C
)
saving and investment are not necessarily equal as they are in a closed economy.
D
)
saving and investment are necessarily equal contrary to the case of a closed economy.
E
)
None of the above.
5)
An open economy
A
)
can save only by building up its capital stock.
B
)
can save only by acquiring foreign wealth.
C
)
cannot save either by building up its capital stock or by acquiring foreign wealth.
D
)
can save either by building up its capital stock or by acquiring foreign wealth.
E
)
None of the above.
7)
Which of the following is false about private savings and government savings?
A
)
SP = Y - T - C
B
)
Unlike private saving decisions, government saving decisions are often made with an eye toward their effect on
output and employment.
C
)
Total savings (S) = SP + Sg.
D
)
The national income identity can help us to analyze the channels through which government saving decisions
influence macroeconomic conditions.
E
)
None of the above; all statements are true.
8)
Every international transaction automatically enters the balance of payments
A
)
once either as a credit or as a debit.
B
)
twice, once as a credit and once as a debit.
C
)
once as a credit.
D
)
twice, both times as debit.
E
)
None of the above.
9
.
An American buys a Japanese car, paying by writing a check on an account with a bank in New York. How
would this be accounted for in the balance of payments?
A
)
current account, a Japanese good import
B
)
current account, a U.S. good import
C
)
financial account, a U.S. asset import
D
)
financial account, a U.S. asset export
E
)
Only B and D.
10) When a country's currency depreciates,
A
)
foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are
more expensive.
B
)
foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are
cheaper.
C
)
foreigners find that its exports are cheaper; however, domestic residents are not affected.
D
)
foreigners are not affected, but domestic residents find that imports from abroad are more expensive.
E
)
None of the above.
11)
The following is an example of Radio Shack hedging its foreign currency risk:
A
)
needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange
deal to buy yen.
B
)
needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack makes a forward-exchange deal to
sell yen.
C
)
needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack buys yen at a spot-exchange 1 month
from now.
D
)
needing to pay 9,000 yen per radio to its suppliers in a month, Radio Shack sells yen at a spot-exchange 1 month
from now.
E
)
None of the above.
13)
If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, and the expected return on dollar
depreciation against the euro is zero percent, then
A
)
an investor should invest only in dollars.
B
)
an investor should invest only in euros.
C
)
an investor should be indifferent between dollars and euros.
D
)
It is impossible to tell given the information.
E
)
All of the above.
17)
18)
The Economist article Hot Money Roils Growth Currencies argues that
A)
Emerging markets currencies have been appreciating.
B)
Emerging markets have been intervening in the foreign exchange markets
C) Emerging markets currencies have been appreciating because of low interest rates in United State
D)
All of the above.
E) None of the above
15
19. Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro.
Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10
percent and on euro it is 4 percent. Show that the Covered Interest Parity condition holds in this case. [5
points]
Answer: One has to plug in the numbers to check whether
Dollar interest rate = (1/spot rate)* Euro interest rate * Forward rate
holds or not. It does indeed.
20. Dollar euro exchange rate is 1.35$/euro. Dollar yen exchange rate is 0.0125 $/yen. What
21. Suppose an European country runs a current account surplus of 900 million euros. Net unilateral
transfer to this country is zero. If its trade surplus is 750 million euros, and its factor payments to foreign
owners of production is 200 million, what must be its receipts on its factors operating abroad? [4 points]
Answer: CA = Trade Balance + Net Factor Payments from Abroad (NFIA). Therefore,
900 = 750 + Receipts from abroad 200, which tells you that the receipts from abroad equal $350
million.
22. Suppose an European country runs a current account deficit of 900 million euros. There are no capital
account transactions, nor any statistical discrepancy. If the nonreserve financial account surplus is 700
million euros what must be the net surplus or deficit in the reserve financial account? What kind of
buying selling could cause this entry? [6 points]
Answer: A CA of -900 requires a + 900 in FA. The non reserve component is +700, so the reserve
component must be + 200, which means that the gross change in this countrys assets held abroad by
foreign central banks the gross change in foreign assets held by this countrys central bank equals 200.
Either foreign banks are buying this countrys assets or this country is selling its own holding of foreign
assets so that it nets out to be 200.
23. Discuss graphically (using the return schedules for dollar and euro deposits) the impact on the spot
exchange rate of an expected dollar appreciation while the dollar and euro deposit interest rates are kept
fixed. [5 points]
Answer: See Figure 13 6 that graphically exhibits how an expected Euro appreciation shifts the Euro
rate of return schedule to the right and therefore Euro spot rate appreciates. In the present question just the
opposite will happen. A dollar appreciation is Euro depreciation. The rate of return schedule will shift to
the left and exchange rate will be lower, i.e., pay less dollars for one euro, i.e., dollar appreciates and euro
depreciates.
(3 points) The dollar euro exchange rate on March 9th 2005 was at 0.8 euro/$. On March
9 2006 the rate had changed to 0.84 euro/$. By how much did the dollar appreciate or
depreciate against the euro?
B) (4 points) Let us assume that the markets were expecting this change in exchange rate on
March 9th 2005 itself. Given that one year interest rate on euro deposits was at 7% on March 9th
2005, what would have been the implied interest rate on dollar deposits if interest rate parity
condition is assumed to hold?
24. A)
th
Answer:
(A) dollars rate of appreciation
= (0.84-0.8)/0.8 = 0.05 or 5%
(B) euro interest rate = dollar interest rate + dollar rate of appreciation
Hence,
Dollar interest rate = 0.07 0.05 =0.02 or 2%