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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.