Download Problems for Macroeconomics, 2/e

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ANSWERS TO END-OF-CHAPTER PROBLEMS
CHAPTER 18
Quick Check
1.
a.
b.
c.
d.
e.
f.
g.
3.
True.
False.
False.
False.
False.
The statement should read: “Given the definition of the exchange rate adopted in this
chapter, if the dollar is the domestic currency and the euro the foreign currency, a
nominal exchange rate of 1.10 means that one dollar is worth 1.1 euros.”
This statement is True.
False.
a.
The nominal return on the U.S. bond is 10,000/(9615.38)–1=4%.
The nominal return on the German bond is 6%.
b.
Uncovered interest parity implies that the expected exchange rate is given by
E(1+i*)/(1+i)=0.75(1.06)/(1.04)=0.76 Euro/$.
c.
If you expect the dollar to depreciate, purchase the German bond, since it pays a higher
interest rate and you expect a capital gain on the currency.
d.
The dollar depreciates by 4%, so the total return on the German bond (in $) is
6% + 4% =10%. Investing in the U.S. bond would have produced a 4% return.
e.
The uncovered interest parity condition is about equality of expected returns, not equality
of actual returns.
Dig Deeper
4.
a.
GDP is 15 in each economy. Consumers will spend 5 on each good.
b.
Each country has a zero trade balance. Country A exports clothes to Country B, Country
B exports cars to Country C, and Country C exports computers to Country A.
c.
No country will have a zero trade balance with any other country.
d.
There is no reason to expect that the United States will have balanced trade with any
particular country, even if the United States eliminates its overall trade deficit.
Explore Further
6.
a.
Considering the evidence through May 2008, the yen appreciated from mid-1985 to mid1995, depreciated until mid-1998, appreciated through the end of 1999, depreciated
through the end of 2001, appreciated through 2004, depreciated through mid-2007, and
then began to appreciate. From a broader perspective, between the January 1979 and May
2008, the yen appreciated by 90%. The yen reached its strongest value against the dollar
in mid-1995.
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136
b.
Depreciation of the yen.
c.
The yen appreciated from the end of 2001 to the end of 2004, and again after mid-2007, .
This did not help the Japanese recovery.
CHAPTER 19
Quick Check
1.
a.
b.
f.
g.
False.
False. An increase in the budget deficit will lead to an increase in the trade deficit, but
we can't conclude that from the national income accounting identity. We have to use our
model to make that prediction.
False.
True.
False. Econometric evidence suggests that a real depreciation does not lead to an
immediate improvement in the trade balance. Typically, the trade balance improves six
to twelve months after a real depreciation. only after six to twelve months between only
after six to twelve months.
True.
False.
a.
There is a real appreciation over time. Over time, the trade balance worsens.
b.
The currency depreciates at the rate of π-π*.
a.
The share of Japanese spending on U.S. goods relative to U.S. GDP is
(0.06)(0.11)=0.7%.
b.
U.S. GDP falls by 2(.05)(.007)=0.07%.
c.
U.S. GDP falls by 2(.05)(0.11)=1.1%.
d.
This is an overstatement. The numbers above indicated that even if U.S. exports fall by
5%, the effect is to reduce GDP growth by 1.1%.
c.
d.
e.
2.
3.
Dig Deeper
7.
a.
Y = C + I + G + X – IM
Y=c0+c1(Y-T)+d0+d1Y+G+x1Y*-m1Y
Y=[1/(1-c1-d1+m1)][c0+c1T+d0+G+x1Y*]
b.
Output increases by the multiplier, which equals 1/(1-c1-d1+m1). The condition
0< m1< c1+d1<1 ensures that the multiplier is defined, positive, and less than one. As
compared to the original multiplier, 1/(1+c1), there are two additional parameters: d1,
which captures the effect of an additional unit of income on investment, and m1, which
captures the effect of an additional unit of income on imports. The investment effect
tends to increase the multiplier; the import effect tends to reduce the multiplier.
c.
When government purchases increase by one unit, net exports fall
m1∆Y= m1/(1-c1-d1+m1). Note that the change in output is simply the multiplier.
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d.
The larger economy will likely have the smaller value of m1. Larger economies tend to
produce a wider variety of goods, and therefore to spend more of additional unit of
income on domestic goods than smaller economies do.
e.
small economy (m1=0.5)
large economy (m1=0.1)
f.
∆Y
1.1
2
∆NX
0.6
0.2
Fiscal policy has a larger effect on output in the large economy, but a larger effect on net
exports in the small economy.
CHAPTER 20
Quick Check
1.
a.
b.
c.
d.
e.
f.
False.
True.
True.
True.
Uncertain. If expected appreciation of the yen is greater than or equal to the interest rate
in other countries, than foreign investors will hold yen bonds.
False. The money stock will change in response to shocks (including policy shocks) so
that the home interest rate equals the foreign interest rate.
2.
The appropriate mix is a monetary expansion to lessen the value of the currency (and thereby to
improve the trade balance) and a fiscal contraction to prevent output from increasing.
4.
a.
The IS curve shifts right, because net exports tend to increase.
increases.
b.
The IS curve shifts right, because the increase in i* tends to create a depreciation of the
domestic currency and therefore an increase in net exports. Domestic output increases.
The interest parity line also shifts up.
c.
A foreign fiscal expansion is likely to increase Y* and to increase i*. A foreign monetary
expansion is likely to increase Y* and to reduce i*.
d.
A foreign fiscal expansion is likely to increase home output. A foreign monetary
expansion has an ambiguous effect on home output. The increase in Y* tends to increase
home output, but the fall in i* tends to reduce home output.
Domestic output
Dig Deeper
5.
a.
An increase in Y* shifts the IS curve to the right. The incipient rise in the home interest
rate creates a monetary expansion as the home central bank purchases foreign exchange
to prevent the domestic currency from appreciating. So, the LM curve shifts right.
Output and net exports increase.
b.
The interest parity line shifts up, and the LM curve shifts left as the central bank sells
foreign exchange to prevent the domestic currency from depreciating. Output falls,
which leads to an increase in net exports.
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138
c.
A fiscal expansion in the Leader country, which increases Y* and i*, reduces domestic
output, if the effect of Y* on domestic output is small. A monetary expansion in the
Leader country, which increases Y* and reduces i*, increases domestic output.
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