Blog

Information for questions 18-20 A certain country has currency called the kroon (symbol Kr). This country tries to keep a fixed exchange rate with the dollar, at 12 $/ Kr. The figure represents the daily supply and demand for the kroon. The numbers on the horizontal axis are in billions of kroons, but ignore that this is in “billions” part, that is, just treat the numbers as whole numbers in kroons. For numeric questions, only the exact answer is accepted, so double check that you are reading the graph correctly. All graphical answers can be made exact with the assumptions: if two curves seem to cross where two grid lines also cross, then they do; if they intersect a grid line at midpoint, then it’s exactly in the middle. Thus, S and D cross exactly at 10, and when the supply of kroon is 300, the supply price is exactly 6.5 $/Kr. According to the figure, how many kroon must this country’s central bank buy or sell daily, in order to sustain the fixed exchange rate? Enter a positive number if you think it must buy kroon and a negative number if you think it must sell kroon (thus, if the answer is “it buys 300 kroon daily”, enter 300, if the answer is “it sells 250 kroon daily” enter -250). Enter 0 if you think the central bank doesn’t need to either buy or sell kroon.

Chapter 10 Formulas and Definitions All symbols are as in the textbook and lectures. Unless otherwise stated, you can assume that two countries have purchasing power parity (PPP) and interest rate parity. Exchange rate when there is PPP: R = P / P*. In this formula, P and P* can be regarded as prices of individual goods or of consumption baskets. Approximate relationship when there is interest rate parity: i – i* = (F – R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i – i* = F/R – 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i=1.0134, a foreign interest rate of 22.5% is written i*=1.225. Note that you may be asked to enter answers as percentages, though. ***************************** The U.S. dollar/British pound exchange rate is $2/£. A Big Mac costs $5 in New York City and £4 in London. The difference in the cost of the Big Mac is representative of the difference in the cost of living in the two cities. We can conclude that the pound is ________, and U.S. tourists will be ________.

Sovereign default refers to

Chapter 10 Formulas and Definitions All symbols are as in the textbook and lectures. Unless otherwise stated, you can assume that two countries have purchasing power parity (PPP) and interest rate parity. Exchange rate when there is PPP: R = P / P*. In this formula, P and P* can be regarded as prices of individual goods or of consumption baskets. Approximate relationship when there is interest rate parity: i – i* = (F – R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i – i* = F/R – 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i=1.0134, a foreign interest rate of 22.5% is written i*=1.225. Note that you may be asked to enter answers as percentages, though. ***************************** Information for questions 13-15 The figure represents possible supply and demand curves for the Brazilian Real (symbol R). The vertical axis is in the usual unit of U.S. dollars per Real. Note that one vertical grid spacing is 1 cent. Initially the Real is trading with supply curve S0 and demand curve D0, therefore the initial exchange rate is 0.13 $ / R. For numeric questions, only the exact answer is accepted, so double check that you are reading the graph correctly. All graphical answers can be made exact with the assumption: if two curves seem to cross where two grid lines also cross, then they do. At a later time, suppose that supply is S1 and demand is D2. An American purchases a tour package in Brazil, and pays 10,000 Reais for it. How much does he pay for this, in dollars? Only exact answer is accepted, so double check that you are reading the graph correctly.

Chapter 9 Formulas and Definitions All symbols are as in the textbook and lectures. CA + FA = 0, ignoring KA, and except for the statistical discrepancy GDP = C + I + G + X – M GNP = GDP + net primary income + net secondary income GNP = C + I + G + CA S + (T – G) = I + CA ********************************** An American architect designs a building in Medellín, Colombia, and gets paid for her work in Colombian pesos. For this question, consider only the payment directly made in exchange for the architect’s work, not the separate transaction of exchanging Colombian pesos for U.S. dollars which is possibly done afterwards. In the U.S. Balance of Payments accounts, the payment to the U.S. architect is entered as

Chapter 9 Formulas and Definitions All symbols are as in the textbook and lectures. CA + FA = 0, ignoring KA, and except for the statistical discrepancy GDP = C + I + G + X – M GNP = GDP + net primary income + net secondary income GNP = C + I + G + CA S + (T – G) = I + CA ********************************* If there is a trade deficit, which of the following is true?

Chapter 9 Formulas and Definitions All symbols are as in the textbook and lectures. CA + FA = 0, ignoring KA, and except for the statistical discrepancy GDP = C + I + G + X – M GNP = GDP + net primary income + net secondary income GNP = C + I + G + CA S + (T – G) = I + CA ********************************** Information for questions 1-4 The table below lists the major items in a country’s Balance of Payments accounts. This country’s Capital Account is 0. The amounts are in billions of dollars, but ignore the “billions” part, that is, just treat the numbers as whole numbers in dollars. For all questions, enter a whole number of the appropriate sign. Enter 0 if the answer cannot be obtained with the information given. Only exact answer is accepted, so double check your calculations. Calculate the Trade balance. Enter a positive number for a Trade surplus, and a negative number for a Trade deficit.

Chapter 10 Formulas and Definitions All symbols are as in the textbook and lectures. Unless otherwise stated, you can assume that two countries have purchasing power parity (PPP) and interest rate parity. Exchange rate when there is PPP: R = P / P*. In this formula, P and P* can be regarded as prices of individual goods or of consumption baskets. Approximate relationship when there is interest rate parity: i – i* = (F – R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i – i* = F/R – 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i=1.0134, a foreign interest rate of 22.5% is written i*=1.225. Note that you may be asked to enter answers as percentages, though. ***************************** A U.S. firm has a contract to export automobiles to Malaysia. The contract stipulates that the firm will be paid a certain amount of Malaysian ringgits when it delivers the automobiles six months in the future. This firm wants to hedge (reduce its foreign currency risk). It would do so by

Chapter 10 Formulas and Definitions All symbols are as in the textbook and lectures. Unless otherwise stated, you can assume that two countries have purchasing power parity (PPP) and interest rate parity. Exchange rate when there is PPP: R = P / P*. In this formula, P and P* can be regarded as prices of individual goods or of consumption baskets. Approximate relationship when there is interest rate parity: i – i* = (F – R)/R. For the purpose of this test, take this equation to be exact, not approximate. You can also use the equivalent equation i – i* = F/R – 1. For this formula to work, i and i* must be fractional, not percentages. So, a domestic interest rate of 1.34% is written i=1.0134, a foreign interest rate of 22.5% is written i*=1.225. Note that you may be asked to enter answers as percentages, though. ********************************************* An Italian car costs $32,000 in New York. Currently, €1 (1 euro) trades for $1.19. Euro is the currency used in Italy. If the United States and Italy are at Purchasing Power Parity, calculate the price of the same car in Italy, in euros. Only answers approximately within 1% are accepted, so double check your calculations, and enter a whole number, rounding to the nearest euro.

Consider the following two statements.I. The East Asian financial crisis was an example of macroeconomic imbalances.II. The Mexican peso crisis was an example of macroeconomic imbalances.