International Economics 7th Edition Theo Eicher, John H. Mutti - Solutions

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Why would a rise in the Chinese exchange rate help the U.S. or European markets? Exactly who would it help and who would it hurt?1 Explain the link between China's exchange rate and U.S. interest rates.2 Explain the link between China's trade surplus and U.S. interest rates.
If one developing country experiences a payments and debt crisis, explain through which linkages the crisis might spread to other countries in the region?
In what ways is the Asian debt crisis similar to, and different from, the difficulties which Latin America experienced in the early 1980s?
If China maintains its large trade surplus, but allows its exchange rate to be market determined, what do you think will be the impact on the U.S.$YYuan exchange rate? What would be the impact on U.S. interest rates?
The so-called “unholy trinity” problem. Explain with the use of graphs and references to Chapter 18 why an exchange rate system, including pegged exchange rate, full capital mobility, and the use of monetary policy for domestic needs, cannot work. Apply the theory to the EMS experience from
The lira and the Belgian franc are participating in the ERM with the +/- 2.25 percent band, i.e. the currencies are allowed to fluctuate by this percentage around the central parity (the official peg). Assume that the central parity between the Belgian franc and the lira is 31.5 lira per Belgian
In order to finance the reunification of East and West Germany in the late eighties, the German government issued new bonds to finance the reconstruction and modernization of East Germany.a. What was the potential effect of such action on German prices?b. What policy did the German central bank,
Assume that a Mediterranean volcano blows up, damaging a large region of an EMU member country. Explain what may or may not (but should) happen to stabilize the economy of the region.
What is the fundamental difference between the ECU" and the "euro" as European monetary instruments?
The existence of a European Economic and Monetary Union implies that the European Central Bank must be completely in charge of the European monetary policy. The monetary policy agreed upon by the ECB is now carried out by the various national central banks. What impor tant qualification had to be
At the end of the 1980s, the inflation rate in most ERM member countries had converged towards the low and stable German inflation rate of 2 percent. In addition, the real interest rate for all the member countries was equal to 3 percent. However the Italian inflation rate was still a few points
The euro was introduced in January 1999 at $1.17 per euro. Its value dropped steadily to around $0.82 per euro at its lowest. Fearing a currency crisis, the ECB (along with the FED) decided to intervene in September 2000. Describe the concerted actions of the ECB and of the FED. What was the impact
What are the Basel Accords (Basel | and II)? What problems were the accords designed to address?
You are an economist advising an Asian country on its exchange rate regime choice. In a conference, its leaders tell you that domestic stability (full employment) is their first priority and that they have very large foreign currency reserves. What exchange rate regime do you recommend? Given your
If exports make up 75 percent of your country's GDP, what type of exchange rate regime should you have? What are the tradeoffs?
Explain to your president why the gold standard will bring her fame in good times and disrepute in recessions.
Explain why the IMF and the World Bank were perceived to be necessary for the Bretton Woods System.
How did the role of the IMF evolve after the demise of Bretton Woods?
Explain how concerted intervention took place under the Plaza and under the Louvre agreements (cf. Chapter 13).
Exchange rate fluctuations since 1973 appear to be larger than warranted by the underlying economic circumstances in the nations involved. What reasons have been offered to explain this experience?
Towards the end of the Bretton Woods era, the German currency (DM) was undervalued with respect to the dollar. What was the impact on the U.S./German balance of trade? What steps did Germany take, with the approval of the IMF, to solve the problem?
What is the main difference between a gold standard and a gold-exchange standard?
In the thirties, countries tried to fend off the Depression and stimulate their economy with beggar thy neighbor methods. Explain the mechanism of a competitive devaluation (cf. Chapter 19). Since a devaluation produces a balance-of-trade improvement only at the expense of the trade partners, what
When Great Britain decided to go back on the gold standard in 1925, the Chancellor of the Exchequer chose the pre-1914 gold parity for the pound. Use the purchasing power parity concept introduced in the previous chapter to explain how he could have derived a more realistic parity.
We are in 1890: Great Britain and France are both on the gold standard. British exports to: France exceed their imports from France. What will happen to the exchange rate between the pound and the franc? Describe the adjustment mechanism.
According to Gresham's law, bad money always displaces good money. What is the implication of this law for a bimetallic silver/gold - standard?
Spain and bullionism. In the sixteenth and seventeenth centuries, as a result of colonizing South America, Spain acquired huge amounts of gold. However, it seemed that the more gold there was flowing from the Americas into Spain, the more gold there was flowing out of Spain to other European
In 1870, as a consequence of their defeat in the Franco-Prussian war, the French were directed to pay 1 million francs-or in gold to the Prussians. Use your understanding of the gold standard adjustment to describe the economic consequences for the two countries.
The central bank of Pecunia, a small country, decides to cut the money supply permanently by 10 percent. Assume a sticky price model in the short run, where prices eventually adjust in the long run. Explain what happens to the interest rate, the real money supply, the price level, the expected
Throughout the year in 1980, inflation in the U.S. was 13.5 percent while in the U.K. it was 18 percent. During that same year, the exchange rate, $/£; increased from 2.225 on January 1 to 2.292 on December 31. Find this point on Figure 20.1. Does this point meet the PPP criteria?Why or why not?
International Comparisons An average consumer in Canada consumes 10 pounds of oranges, 4 loaves of bread, and 5 pints of beer. During the same period, the average Australian consumer consumes 6 pounds of oranges, 5 loaves of bread, and 6 pints of beer. Assume that the price of oranges in Canada is
When you examine series constructed on the exchange raté approach and series constructed on the PPP approach to compare gross national income per capita, what can you say about the dispersion for the two series? What happens to the richer countries and what happens to the poorer countries when the
Assume that Malaysia, like many developing countries, has a dual economy: a vibrant export sector where they manufacture computer components for various Japanese companies (tradable)and a sector that produces local goods only (non-tradable). Assume that PPP holds so their exchange rate is the ratio
You are told that one of the reasons why PPP does not hold is the existence of tariffs and transportation costs. Later on in the chapter you are told that these two factors could be factored in because they are constant. Explain what would happen to international prices if tariffs and
In the mid 1990s, the Irish economy was at full employment. However since Ireland was planning to join the EMU, Ireland had a fixed exchange rate arrangement with the other members and had to follow its cue from the European Monetary Institute (EMI), the European organization that was harmonizing
Switzerland adheres to a flexible exchange rate arrangement and allows very high to perfect levels of capital mobility. Unfortunately their economy is in a slump and their currency is too strong for the good of their economy. The exchange rate of 1.60 SF per euro overestimates the health of the
The French and the German economies are very open to each other. They trade and invest freely in each other’s economies. Assume that they had a flexible exchange rate regime at the time of the German reunification (in reality this was not the case). In order to finance the reunification of East
Two large countries, domestic and foreign, under a flexible exchange rate regime, allow perfect capital mobility. The domestic economy, weary of inflationary pressures, cuts the money supply.Draw two graphs side by side showing the IS and the LM curves and the initial equilibrium for each country.
A small country, Pecunia, under a flexible exchange rate regime has achieved both internal (IS-LM intersection) and external balance. Pecunia trades a lot with the rest of the world, but allows only limited access to its capital market while its citizens need authorizations to invest abroad.
From its inception in 1999 to about 2002, the euro kept depreciating against the dollar.a. Show, with a graph, how European monetary policy could have been used to boost the euro and how that would have impacted on he U.S. economy.b. Draw a full employment line in your graph and discuss how this
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Use the policy mix graph to show how the policy makers can bring an economy with balanceof-payments surpluses and unemployment to a stable level of output at full employment.
A small country, Alpenstein, has initially achieved both internal and external balance. Alpenstein prohibits international financial capital flows, so FA-0. Alpenstein has a fixed exchange rate regime and defends it through official intervention; it does not sterilize. An exogenous shock occurs:
A small country, Cascadia, has initially achieved internal and external balance. International financial capital flows are high but not perfectly mobile. Cascadia commits to a fixed exchange arrangement and defends it through intervention, but it does not sterilize. Cascadia elects a new prime
A small country, Pecunia, under a fixed exchange rate regime, has achieved both internal (IS-LM intersection) and external balance. Pecunia trades a lot with the rest of the world. Pecunia's central bank does not sterilize, but it fears inflation. In addition, Pecunia only allows limited access to
Countries within the European Economic and Monetary Union have adopted a common currency, the euro, and a common monetary policy dictated by the European Central Bank. Can members raise their output using domestic fiscal and monetary policies? Use graphs to explain both policies.
You are a benevolent dictator in a small open economy with a massive government deficit, capital controls, and a large balance of payments deficit. Given your fixed exchange rate regime, describe the policies you can use to get the economy back to an internal and external balance. Provide diagrams
Be an economic detective. How could the above country have ever been in need of the reserve loan? Be specific. Use the Mundell-Fleming model and draw a graph.
If a country with a fixed exchange rate has an outstanding reserve loan from the IMF, what does the country need to do to repay it? Draw a graph of the exchange rate market and of the Mundell-Fleming model.
Hong Kong managed to maintain its currency board during the East Asian crisis. During the crisis Hong Kong had severe reserve outflows and then exorbitant interest rates. Use the Mundell-Fleming model to show how that could occur. Start with a balance-of-payments equilibrium. Draw a graph.
Outline the relationship between savings and the Chinese balance of payments.
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Why could a narrow revaluation find McKinnon's support
is McKinnon's primary argument based on Chinese or U.S. factors?
What are McKinnon's arguments against a revaluation of the yuan?
If it becomes riskier for Americans to invest in Algeria due to political turmoil in that country, what happens to the American BP=0 line (assume a two-country model).
The BP=0 line corresponds to equilibrium on the foreign exchange market. With fixed exchange rates, it is defined in terms of the amount of intervention needed to stay on the BP=0 line. How much intervention is needed?
How does the BP line change when the contagion coefficient “c” changes?
Derive the BP=0 line when interest rates are on the horizontal axis and income is on the vertical axis.
Assume that the interest rate in the Netherlands is 10 percent, i.e. i* = 0.1, the nominal exchange rate E between the U.S.$ and the euro is U.S.$1.30 /€ while the expected exchange rate in a year E®,,, is U.S.$1.32 /€.a. Is the euro expected to appreciate or to depreciate with respect to the
A one-year bond denominated in $ earns an interest rate of 5 percent per year. A one-year bond denominated in £ earns 7 percent per year and the exchange rate is $1.6714/£1. Assume that an investor can hedge on the forward market and that the 90-day forward exchange rate is$1.6602/£1.a.
Assume F,,, increases:a . What would this say about people’s expectations about E,, ,?b . Would capital flow into or out of the country?ig: How exactly would the domestic balance of payments be affected?d. What would happen to the domestic/foreign interest differential?e. With flexible exchange
You open the Wall Street Journal and see that the spot rate is $1 for 100 yen. The interest rate in Japan on a one-year, yen-denominated deposit is:8 percent. The U.S. annual interest rate on dollar deposits is 5 percent.a. Provide a formula for the forward rate and calculate the forward rate. .b.
Assume a country with flexible exchange rates has a financial account given by: FA = FA+ TR(i = i*) where TR are transaction costs. Show how the BP = 0 line behaves in the i/Y space as transaction costs increase.
Foralong time, interest rate differentials between European countries were high. Use the concept of interest parity to explain how interest rates moved closer and closer together as more countries joined the European Exchange Rate Mechanism, eventually introducing perfect capital mobility.
When the dollar depreciates, .a. What should happen to international capitalflows in and out of the U.S., according to interest arbitrage? okb. What should happen to the return on financial investment/equity prices in the U.S., according to interest arbitrage?c. Write down an interest arbitrage
How does carry trade work and what is its effect on the foreign exchange markets? What are the risks of such strategies?
Do these findings go against the theory developed in the first part of the chapter? Explain.
"Empirical studies show that high rate currencies tend to appreciate while low rate currencies tend to depreciate."
Why should investors be able to gain from uncovered interest arbitrage?
Why can't investors gain from covered interest arbitrage according to the theory?
Currency arbitrage. Assume that the exchange rate in New York is $1.1727/€ and in Paris it is 0.852€/$.a. What actions will the currency arbitrageurs in the various banks (U.S. or France) take to realize a gain?b. How much will they gain for each $1,000 traded? (assume no costs).c. What will be
Speculation on the forward market. Use the data from earlier questions.a. Ifa speculator believes that in 90 days the $/SF spot exchange rate is going to be $0.7610/ SF, explain which actions he will take to speculate on the currencies.b. Assuming that he plans to use $1,000,000 for his speculative
Insuring against exchange rate risk, use the exchange rate data from the previous questions.a. Assume that Macy, a U.S. importer of Tissot Swiss watches, has to make a 1,000 SF payment~in 90 days and wishes to use the forward market to insure against foreign exchange risk.Explain carefully how they
The forward exchange rate (90-day) between the $ and the Swiss franc is $0.7613/SF and the forward exchange rate (90-day) between the dollar and-the euro is $1.1659/euro. (Use the spot exchange rates quoted in question 3.)a. Are the markets expecting the Swiss franc to depreciate or to appreciate
Cross exchange rates calculation. The spot exchange rate between the $ and the Swiss franc is$0.7602/SF and the exchange rate between the dollar and the euro is $1.17/euro. Calculate the exchange rate between the euro and the Swiss franc as quoted in France.
What is the essential difference between an exporter and a speculator in the foreign exchange market?
Suppose you are a U.S. bicycle dealer. You have signed a contract in which you agree to import 1,000 bicycles from a U.K. manufacturer and to pay £100,000 for them 6 months from today.How exactly can you use the forward exchange market to protect yourself against exchange rate risk?
Repercussions. Assume two large countries, Cascadia and Sierra. The real exchange rate is fixed. Cascadia’s economy is described by the following equations:The economy is in equilibrium when income Y = C +1 + G + X—IM. The specifications for the equations in Cascadia are identical to those of
In 2001, Argentina experienced a severe balance-of-payments crisis and defaulted on its government loans.a. Use the TB/Income diagram to outline all Argentinian policy options that could have created the crisis.b. Can you imagine why a country would engage in policies that create problems like the
Imagine the U.S. was following the monetary approach to the balance of payments. Draw the effects of the increase in government expenditures associated with the 2001 Bush tax cut. Be sure to highlight the crowding-out effect. Given your answer, can you explain why the tax cut was eventually
In February 2002 Uruguay had a massive balance of payments deficit. What would be the effect on output if Uruguay had not allowed its exchange rate to float and had maintained a fixed exchange rate in June, while following monetary approach to the balance of payments? Draw a alas Draw another graph
Why is the IMF unpopular in exactly the countries to which it provides loans? Be specific in your economic reasoning and provide graphs for all parts of your answer.
Le On August 8 2002 Brazil received a 30-billion dollar loan from the IMF.a. Draw a graph to explain why Brazil may have needed the loan.b. Outline all other options (in the graph) that Brazil had in order to avoid having to take the IMF loan. sc. If other options existed, why were they not
Use the model below to find the impact of a devaluation in a fixed exchange rate regime. (Note that now the import and the export equations includethe oc rate.) Assume the following model of the economy:Where Y is domestic income. The interest rate is. fixed. Prices are fixed.a. Calculate the
Assume a small country is characterized by the following equations:Consumption , C=220+.7(Y-1)Investment L= 200 Government spending G = 100 Tax T= 100 Imports M= 100 + .2Y Exports X = 400
On Oct. 30, 2000 the Wall Street Journal announced that “U.S. income growth slowed to 2.7 percent from 5.3 percent in the previous quarter. The 2.7 percent came in well below the forecast 3.5 percent.” Assume Hong Kong and the U.S. are on a fixed exchange rate regime, while the U.S. and Europe
Under fixed exchange rate regimes, when countries seek to improve their trade balance with fiscal policy, how is policy effectiveness influenced by the marginal propensity to import? Draw graphs to explain your answer.
From the Wall Street Journal Online News Roundup, “Foreign Exchange Section” WSJ May 3, 2002: NEW YORK: “The dollar fell sharply in Friday trading, with dealers clearly worried about the sustainability of the U.S. economic recovery. In midday trading, the dollar was at ¥126.93, compared with
In 1995, Mexico maintained a fixed exchange rate régime relative to the U.S. dollar. In the six months prior to the Mexican national elections in October 1995, the public debt increased by 30 percent.a. Use the TB/Y diagram to explain the effects of the increase in public debt. Be specific;
Assume that the exchange rate between the euro and the pound is 1.5€/£ originally. Then the euro depreciates by 25 percent against the pound. The price of exports is €1 while the price of imports is £1. Due to the depreciation, European exports to the U.K. increase from 10 to 11 and its
The market for foreign exchange. Construct the demand for and the supply of euros using the U.S. demand for foreign imports and the European demand for U.S. exports. Assume only two trade partners: the U.S. and Europe. Also, assume only one import good, cars (VW) and one export good, computers
When the Brazilian currency fell 55 percent against the dollar in the first few weeks of 2002, what was the expected impact on the trade balance?a. Immediately (in the very short run)? (Why? Be specific, use a graph)b. Six months later? (Why? Be specific, use a graph)c. How is the Marshall-Lerner
Draw the supply and demand for yen with the dollar/yen exchange rate on the vertical axis.Americans’ taste changes and they now import European cars instead of Japanese cars. Assume a fixed exchange rate regime and use your graph to answer the following questions with clear, in-depth
Use the bilateral exchange rate data between the euro and the British pound and between the euro and the dollar in 2 consecutive years (5/9/2006 and 5/9/2007) to calculate the trade weighted or multilateral exchange rate (TWI) for the euro over the period. Set the first year as the base year, i.e.
Let P,, be the GDP deflator in Great Britain (U.K.) and P; the GDP deflator in Switzerland.Suppose P,,, = 2.5 and P= 1.5a. Calculate the real exchange rate (RER Switzerland/U.K. — Switzerland is the domestic economy) corresponding to each of the following SF/£ nominal exchange rates (E): the

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International Economics 7th Edition Theo Eicher, John H. Mutti - Solutions

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