Download Homework assignment 7

ECON 202 – Economics II
Fall 2005 – Homework Assignment 7
Professor: Maria Pia Olivero
NAME: _______________________________________________
MULTIPLE CHOICE SECTION
(60 points, 4 each)
1) Under a system of floating exchange rates, an increase in the demand for dollars
by foreigners will cause a(n) -------------------- of the dollar
a. Devaluation
b. Revaluation
c. Appreciation
d. Depreciation
2) Purchasing power theory says that:
a. Only the volume of exports and imports determines exchange rates,
interest rates have nothing to do with exchange rates
b. All countries are better off with a system of fixed exchange rates
c. Adjustment of fixed exchange rates should be symmetrical between deficit
and surplus countries
d. In the long run, exchange rates adjust to reflect differences in the price
levels between countries
3) If inflation in the United States is at an annual rate of 2% and inflation in Brazil is
at 8%, then the PPP theory suggests that in the long run the dollar price of one
Brazilian real will:
a. Increase at an annual rate of 8%
b. Decrease at an annual rate of 6%
c. Increase at an annual rate of 6%
d. Increase at an annual rate of 2%
4) The exchange rate is one british pound equals $1.75. If the exchange rate changes
to one british pound equals $1.5, we can conclude that, for a British buyer, a pair
of American made moccasins have become ----- expensive and, for a US buyer, a
British cashmere sweater has become----- expensive
a. more; more
b. more; less
c. less; more
d. less; less
5) In Tokyo, a Big Mac sells fore 500 yen. The dollar : yen exchange rate is one
dollar per 125 yen. The price of Big Mac in dollars is:
a. 500
b. 0.25
c. 4
d. 5
6) When goods or services cross international borders
a.
countries must ship gold to make payment.
b.
money must generally move in the opposite direction.
c.
a future shipment must be made to offset the current purchase.
d.
payment must be made in another good, using barter.
7) The rate at which one currency is traded for another is called a(n)
a.
prime rate.
b.
trade rate.
c.
exchange rate.
d.
money rate.
8) Who among the following is most likely to favor an appreciation of the U.S. dollar?
a.
a German professor visiting Chicago
b.
an American farmer who depends on exports
c.
an American professor on a tour of Austrian universities
d.
Disney World in Orlando, Florida, a popular destination for foreign
tourists
9) Which of the following would cause an increase in the demand for U.S. dollars?
a.
an interest rate cut in the United States
b.
an interest rate cut in Europe
c.
an interest rate increase in Europe
d.
a recession in Europe
10) If exchange rates are determined in a floating rate system, what determines the value
of a U.S. dollar in terms of euros?
a.
government exchange rate policies
b.
IMF rules and policies
c.
demand and supply
d.
central bank interventions
11) If Japanese tourists visit Yellowstone Park, what is the effect in the foreign exchange
market?
a.
It will increase demand for U.S. dollars.
b.
It will decrease demand for U.S. dollars.
c.
It will increase supply of U.S. dollars.
d.
It will decrease supply of U.S. dollars.
12) The exchange rate between yen and dollars at one point in 2002 was 128 yen per
dollar. If a Big Mac, fries, and a Coke cost $3.90 in San Francisco, how much would the
same order cost in yen in Osaka?
a.
692
b.
499
c.
392
d.
122
13) A recession in the United States will tend to cause recessions in other countries
because as U.S. GDP falls, U.S.
a.
tariffs will automatically rise.
b.
exports will rise.
c.
imports will fall.
d.
exports will fall.
14) When exchange rates are set by government decree,
a.
appreciation is called devaluation.
b.
depreciation is called devaluation.
c.
depreciation is called deflation.
d.
appreciation is called inflation.
15) A fixed exchange rate can be maintained by a government as long as it has sufficient
a.
supplies of its own currency.
b.
foreign reserves.
c.
gold and other precious metals.
d.
tax revenues.
SHORT ANSWER SECTION
Question 1 (20 points)
There are rumors that there is about a to be a military coup in a Latin American country.
Explain what you think will happen to the country’s exchange rate (be sure to discuss the
impact on both the supply and demand in that country’s market for foreign currency).
Question 2 (20 points)
a) Analyze the impact of an expansionary monetary policy in an economy that is
open to international trade (10 points).
b) Analyze the impact of an expansionary fiscal policy in an economy that is open to
international trade (10 points).
Reading 12 (for section VIII): John Quiggin, “The Unsustainability of U.S.
Trade Deficits”, The Economists’ Voice, Volume 1, Issue 3 2004 Article 2.
(mandatory)
1) Why are sustained large deficits in goods and services a problem? (10%)
2) What are available options to restore the balance in goods and services trade?
(10%)
3) How do reduced budget deficits (or increased superavits) affect the trade balance?
(10%)
Reading 13 (for section VIII): “The Effects of a Booming Economy on US
Trade Deficits”, Current Issues in Economics and Finance, New York Fed,
Volume 7, number 2, February 2001. (mandatory)
1) How does growth in GDP (relative to that of other countries) affect the trade
deficit? (10%)
2) How do the authors define “potential output”? (10%)
3) How did cyclical forces contribute to the US trade deficit between 1996 and
1999? (10%)
4) How does the desirability of US assets in international markets affect the trade
balance? (10%)
Reading 14 (for section VIII): “Has The NAFTA Hurt the American
Economy?”, in Swartz and Bonello, Taking Sides: Clashing Views on
Controversial Economic Issues, Issue 17, Part 3. (extra credit)
1) Do you agree with Scott or with Griswold? Why? (5%)
2) How has your everyday life changed since NAFTA was signed? (think about your
consumption behavior, the value of the dollar, etc.). (5%)
3) There were clearly some winners and some losers after NAFTA was signed. Is
there any way to make everybody better off (tan before NAFTA) and still keep
NAFTA in place? Think about the theory of comparative advantage and gains
from trade to answer this question. (10%)
Reading 15 (for section VIII): “The Euro’s Rise May Demand Action”, New
York Times. (extra credit)
1) What’s the problem faced by European monetary authorities? (5%)
2) What are the three possible actions for the European Central Bank and what does each
do? (10%)
Reading 16 (for section VIII): “A Field Guide to the Falling Dollar”, New
York Times, December 5, 2004. (mandatory)
1) How can an abrupt fall of the dollar affect the economy? (10%)
2) A dollar depreciation always implies less imports and more exports. However,
why is the effect on the macro economy different if the dollar loses value slowly
than if it takes an abrupt dive? (10%)
3) Is the fall in the dollar enough to close the trade gap? If not, what else is needed?
(10%)