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NAME:_________________________________________ THE GEORGE WASHINGTON UNIVERSITY Department of Economics Economics 180 Section 11 Prof. Steve Suranovic Spring 2010 Quiz #2 – Answers 1. (7) Write the term that is described by each of the following statements. Note that the answer relates to the italicized word or phase. A. the value of GNP if the current account has a deficit of $200 billion and domestic spending is $1.1 trillion. $900 billion B. Of paying off past debts or accumulating new debts, what a country is more likely doing if a debtor country has a trade surplus? Paying off past debts C. the US dollar/British pound exchange rate is the value of which currency? British Pound D. what we would call a decrease in the dollar/euro exchange rate. Depreciation of the euro or Appreciation of the dollar E. the percentage change in the dollar value with respect to the Japanese yen if the exchange rate rises from 100 yen/$ to 107 yen/$ F. according to the IRP theory, a decrease in the euro interest rate will cause this change in the value of the US dollar currency. (appreciation, depreciation or no change) G. according to the IRP theory, a decrease in the US interest rate will cause this change in the value of the US dollar. (appreciation, depreciation or no change) + 7% Appreciation Depreciation 2. (4) Approximate recent values for four country’s GDP, trade balance, and international investment position is listed below. Refer to this data to answer to each question. (billions of US$) Spain Brazil South Korea South Africa GDP $1600 $1550 $925 $275 Trade Balance (TD) - $91 - $13 + $35 - $18 - $1300 - $400 - $ 200 - $ 11 Net International investment position (IIP) A. (2) Which country’s economic situation can be said to be most worrisome based on its trade deficit. Briefly explain why. South Africa is highest % of GDP at 6.5% of GDP B. (2) Which country’s economic situation is most worrisome based on its net international investment position? Briefly explain why. Spain is highest % of GDP at 81.2% of GDP 3. (4) The current dollar/euro exchange rate is 1.35. Suppose you plan to invest $1000 in a simple interest one-year European CD paying an interest rate of 2% per year. A. (3) Calculate the rate of return on this investment if you expect the dollar/euro exchange rate to be 1.25 in one year. Show your work. RoReuro = [1.25/1.35] (1 + 0.02) - 1 = -0.056 or about – 5.6% B. (1) What would the US interest rate on a one-year CD have to be to make the US deposit more attractive? Since interest rates are never set below zero, anything at or above 0% would make the US deposit more attractive.