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international economics theory

Questions and Answers of International Economics Theory

Why you think mery county does a blow the un economi charge me hug e Chinese?
Whining from the China pla and change rate regine in the US and in Chin How rope iced by the oculon of waves?
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
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
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
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
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
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
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
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
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
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,
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
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
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
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
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
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.
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
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
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
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
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
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
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 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
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
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
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
Wein voke the pond as a red cheek bon Now that in weld if wegsperiod of grow crane woman what the important economic vanables to watch when investing internationally?
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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
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
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
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
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
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
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
Outline the relationship between savings and the Chinese balance of payments.
Whirl de Chin balay paymes now and by creat
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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:
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
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
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
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

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