International Macro Exam 1 Other Questions

Front 1

A Korean investor is considering investing in bank deposits in Korea and Japan. The annual interest rate on Korean deposits is 6.0 %, versus 3.0% on deposits in Japan. The current exchange rate is 8 won/yen & the expected exchange rate in a year is 8.25 won/¥. What is the expected return in won on a yen deposit? Give an exact answer. Show your work.

Back 1

100 won converts to 12.5 = 100/8 yen. After a year, this becomes 12.875 = 1.03(12.5) yen. This is expected to convert into 106.21875 = 8.25(12.875) won, hence the return is 6.21875%.

Front 2

A US export firm produces in the US and exports to Europe. Currently the Euro is $1.25, the firm’s Euro price is 100 Euros, it is selling 10,000 units in Europe and the cost of producing those units is $900,000. What would happen to European sales and production costs if the Euro rose to $1.50 and the firm decreased its Euro price to 80 Euros. Show your work. Assume the price elasticity of demand is 1.5 and the output elasticity of costs is 0.9

Back 2

The price decrease is 20% ((80 - 100)/100 = -0.20). The % increase in unit sales is then 1.5(20) = 30%. Hence the new value for unit sales is 10,000(1 + 0.30) = 13,000 units. Costs will rise by 0.9(30) = 27 percent, hence new costs are $1,143,000.

Front 3

Suppose the nominal interest rate in the US is iUS = 8%, the gdp growth rates in the US and the foreign country are both 3%, US monetary growth is μUS = 5%, and foreign monetary growth is μFC = 20%. Find inflation rates in both countries, πUS and πFC, the world real interest rates, r*, the nominal interest rates in the foreign country, iFC, and the rate of change in the dollar value of the foreign currency, ΔE/E. Show your work. Assume the money demand parameter L is constant in both countries, expected inflation equals actual inflation, exchange rates are determined by purchasing power parity, interest parity holds, & there is no default risk in the US or the foreign country. It is OK to use approximations for this problem.

Back 3

Inflation rates are πFC = μFC – g = 20 – 3 = 17% & πUS = μUS – g = 5– 3 = 2%.

The real interest rate is r* = iUS - πUS = 8 – 2 = 6%

The foreign nominal interest rates is iFC = r + πFC = 6 + 17 = 23%

The rate of change in the exchange rate is ΔE/E = πUS - πFC - = 2 – 17 = - 15%

Front 4

2011 fourth quarter GDP grew at an annualized rate of 2.8%. What component of demand was the biggest source of this growth?

Back 4

ncreased inventories (which is worrisome because it could reflect over ordering by firms)
This was a current events question which will not be repeated

Front 5

We call inflation a hidden tax. Who is being taxed?

Back 5

Holders of money & bonds

Front 6

6. What is the crucial assumption made by Keynesian economists?

Back 6

Slow price adjustment

Front 7

What would cause deflation under the gold standard?

Back 7

Economic growth that exceeded the growth rate in the supply of gold

Front 8

Goods Market) What two financial events dragged our economy down at the start of and during the Great Depression?

Back 8

A stock market crash and widespread bank failures

Front 9

For two countries (Home and Foreign), the uncovered interest parity condition implies that the Home interest rate must equal

Back 9

the Foreign interest rate plus the expected rate of depreciation of the Home currency.

Front 10

real intrest parity

Back 10

it says that asset market arbitrage guarantees real interest rates equalize across countries so that there is one world real intrest rate

Front 11

Fisher effect

Back 11

it says that the nominal intrest rate in a country is equal to the world real interest rate plus the expected inflation rate in a country