ECON 214 Problem Set 13 solutions complete answers

ECON 214 Problem Set 13 solutions complete answers 

 

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Question 1

 

Brexit Accelerates the British Pound’s 100 Years of Debasement by Simon Kennedy & Lukanyo Mnyanda

 

Over time generally, and after the EU referendum vote specifically, the British pound has been able to buy fewer U.S. dollars. Below is a list of possible outcomes. Move the outcomes that result from a less valuable pound to the box labeled “Will happen." Move the other possible outcomes to the other box.

 

Question 2

 

In        there was a 30% devaluation of the British pound. The graph below can depict the influence of the devaluation on the British economy. First, suppose that the British economy is in a long-run equilibrium at point A before the devaluation takes place. 

 

The devaluation will shift the        curve.

 

This curve (from your answer in Part 2) will shift to the       .

 

After the curve shifts, the economy will be at

 

At this point, which of the following is true?

 

Once enough time passes and prices become flexible again, the        shifts to the left.

 

After this shift, the economy will be at

 

Compared to point A, which was the initial starting point for this economy, the

 

Question 3

 

In the short run, when China pegs the yuan to the U.S. dollar, China’s current account        and its capital account       .

 

Question 4

 

Suppose the U.S. government is financing its fiscal policy deficits through the loanable funds market. At the same time, China is pegging the yuan to the dollar. Which of the following statements is correct?

 

Question 5

 

Consider only two countries, China and the United States. China pegs the yuan to the dollar. As a result, China’s        increase, which causes        in aggregate demand and higher level of real GDP.

 

Question 6

 

In each of these scenarios, identify the effects on both the U.S. current account and the U.S. capital account.

 

In the United States, Best Buy company, a U.S. firm, purchases $1 million worth of TVs from the Samsung Corporation, a Korean firm, using U.S. dollars. Samsung keeps the U.S. dollars.

 

Best Buy purchases $1 million worth of TVs from the Samsung Corporation, using U.S. dollars. Samsung then trades its dollars to a third party for won, the Korean currency.

 

Best Buy trades $1 million for Korean won and then uses the won to buy TVs from Samsung.

 

Question 7

 

Every year, thousands of spring breakers flock to Mexico in search of a good time. They exchange millions of U.S. dollars for Mexican pesos. The Mexican central bank anticipates this influx, and it acts to keep its currency stable at the present exchange rate. In the money market, the actions of the spring breakers and the Mexican central bank are consistent with

 

Question 8

 

The price of a dozen roses in the United States is $30. If $0.2597 can purchase 1.00 Israeli shekel, how much does the same dozen roses cost in Israel if purchasing power parity holds? Give your answer to two decimals.

 

If the actual price of a dozen roses in Israel is more than the answer you found in Part 1, how might you account for the discrepancy?

 

Question 9

 

In the short run, a devaluation of the Nigerian naira relative to the U.S. dollar would        aggregate demand in Nigeria  and        aggregate demand in the United States.

 

Question 10

 

China keeps the exchange rate of the yuan artificially low by pegging it to the dollar. If it was allowed to appreciate, what would happen to the AD curve in China? In the below graph, drag the AD curve to the appropriate position to show that scenario. 

 

Question 11

 

Suppose Japan increases its supply of yen from S1 to S2, as illustrated below.

 

This shift in the supply of yen causes the        to depreciate and the        to appreciate.

 

What are the short-run impacts on trade from this change in the supply of yen?

 

What are the long-run impacts on trade from this change in the supply of yen?

 

Question 12

 

The law of one price tells us that, excluding trade barriers and transportation costs, the price of a good tends to be the same in different geographical locations. 

 

If in North Dakota a 3 lb. bag of apples sells for $6 and in in Minnesota it sells for $8, and the transportation costs are the same, how would a seller react in North Dakota? What change would occur in the North Dakota market? Drag the supply curve on the graph below to show the new equilibrium point.

 

Question 13

 

If the capital account in the United States increases, what happens in the short run to the AD/AS graph shown below? Drag the AD line to show the change.

 

Question 14

 

In the market for Guatemalan quetzals, let’s assume two things have happened at the same time: 1) the government has decided to decrease the money supply, and 2) Guatemalan goods have gotten very popular in the United States. Drag the appropriate curves on the graph below to the correct positions.

 

In the graph above, did the quetzal depreciate or appreciate? How about the dollar?

 

Question 15

 

The figure below illustrates the U.S. current and capital account balances since 1980. As you can see, the two accounts are basically mirror images of each other. In 1991, both the current account and capital account balances were roughly zero. The increase in the current account deficit from 1991 to 2006, for example, is matched by an increase in the capital account surplus. To make things simple, assume that the current account includes only the value of exports and imports, and the capital account includes only payments for real and financial assets.

 

Consider the year 1991, when the U.S. capital account and the current account balances were equal to zero. Suppose that Americans buy $10 million worth of cars manufactured in Germany. If Germans use the $10 million to buy air conditioners manufactured in America, both the U.S. current account balance and the U.S. capital account balance are equal to $        million.

 

Suppose instead, the German holders of the $10 million in U.S. dollars purchase shares of General Electric stock. The U.S. current account balance would be equal to $        million, and the U.S. capital account balance would be equal to $       million.

 

Now consider the increase in the current account deficit and the increase in the capital account surplus after 1991. One possible cause of this increase was a(n)        in domestic savings rates.

 

Question 16

 

The graph shows the demand for British pounds (by holders of U.S. dollars). Show what happens if interest rates in Great Britain rise relative to interest rates in the rest of the world. Drag the demand line to the correct position.

 

Question 17

 

The figure below depicts an aggregate demand–aggregate supply model for Japan. Currently, the economy operates at full-employment output, Y*, with a price level of 100.

 

Refer to the figure when answering the following questions. You may want to sketch your own, because some of the curves will shift.

 

Suppose the Bank of Japan acts to increase the supply of yen. The value of the yen will 

 

The change in the value of the yen will lead to a(n)        in aggregate demand.

 

As prices and wages adjust, short-run aggregate supply

 

In the long run, although yen are less expensive, it takes        yen to buy Japanese goods.

 

Question 18

 

The table below shows the price of a Big Mac in the United States and two other countries, along with the exchange rate measured in the number of dollars for one unit of the foreign currency.

 

Recall that purchasing power parity (PPP) is the idea that a unit of currency should be able to buy the same quantity of goods and services in any country. Use the information in the table to see whether PPP holds.

 

The price implied by PPP for a Big Mac in United Kingdom is        pounds.

 

The price implied by purchasing power parity (PPP) for a Big Mac in Mexico is        pesos.

 

Question 19

 

A nation’s balance of payments (BOP) records all payments between that nation and the rest of the world. The BOP is divided into the current account and the capital account. Which of the following transactions belong in the current account? Which belong in the capital account?

 

Question 20

 

The table below reports a simple example of the U.S. balance of payments. To keep things simple, assume that the balance of payments includes only the value of goods and services, and the value of real and financial assets. Note that the table is not complete. You wiill need to calculate the balances in each account. They are not zero.

 

Assume that there are no other items in either the current account or the capital account. Given the information in the table, the value of foreign-owned assets in the United States is  

 

Assume that there are no other items in either the current account or the capital account. Given the information in the table, the value of imports to the U.S. is