ECON 136 (Lab 9-10)

25.0 Add the gain involved due to the depreciation of the dollar ($1.67 - $1.45​)/$1.45 ​= 0.15​, or 15 percent, to the interest paid by the London bank on the​ deposit, 10 percent.​ (The size of the deposit is immaterial to the calculation of the rate of​ return.) (15+10)

Calculate the dollar rate of return on a 5,000 pound sterling deposit in a London bank in a year when the interest rate on pounds is 10 percent and the​ dollar/pound exchange rate moves from ​$1.45 per pound to ​$1.67 per pound. The rate of return will be _____ percent

-8 Add the loss involved due to the appreciation of the dollar ($1.34 - $1.48​)/$1.48 = −0.09​, or −9 percent, to the interest paid by the London bank on the​ deposit, 8 percent.​ (The size of the deposit is immaterial to the calculation of the rate of​ return.) To get real rate of​ return, subtract inflation​ rate, 7 percent in our case. (1.34-1.48)/1.48 = -0.9 -0.9+0.8= -0.1 -0.1 - 0.7 = -0.8 or -8%

Calculate the real dollar rate of return on a 10,000 pound sterling deposit in a London bank in a year when the interest rate on pounds is 8 ​percent, the​ dollar/pound exchange rate moves from ​$1.48 per pound to ​$1.34 per​ pound, and the dollar prices increase by 7 percent. The real rate of return will be _____ percent

16 Remember that the rate of return in percent is equal to 100×​(new price−old price)/old price and that the real rate of return is equal the rate of return minus inflation​ rate, which in this case is 4 percent. [(300-250)x100/(250)] - 4 = 16

Calculate the real dollar rate of return on a bottle of a rare​ Burgundy, Domaine de la​ Romanée-Conti 1978, whose price rises from ​$250 to ​$300 in a​ year, while all dollar prices increased by 4 percent. The real rate of return will be _____ percent ​

B. Y​ = C​ + I​ + G​ + X − M​ + Net capital gain.

Capital gains and losses on a​ country's net foreign assets are not included in the national income measure of the current account. How would economic statisticians have to modify the national income identity Y = C+I +G + X − M if they did wish to include such gains and losses as part of the definition of the current​ account? A. Y​ = C​ + I​ + G​ + X −M minus− Gross capital gain. B. Y​ = C​ + I​ + G​ + X − M​ + Net capital gain. C. Y​ = C​ + I​ + G​ + X − M​ + Gross capital gain. D. Y​ = C​ + I​ + G​ + X − M− Net capital gain.

B. net receipts of factor income from the rest of the world.

GNP​ (Gross National​ Product) equals GDP plus A. the capital consumption allowance. B. net receipts of factor income from the rest of the world. C. Indirect business taxes. D. a statistical discrepancy.

$1800 computation: add two values then negate

Given the following Balance of Payment data for a given​ country: Current Account​ Balance: ​$−2,000 Capital Account​ Balance: ​$200. What must be the Financial Account​ Balance: ​

A. ​consumption, investment, government​ purchases, and the current account balance.

Gross National Product represents the sum of the following expenditure​ categories: A. ​consumption, investment, government​ purchases, and the current account balance. B. ​savings, investment, tax​ collections, and government purchases. C. ​consumption, investment, tax​ collections, and the current account balance. D. ​consumption, investment, government​ purchases, and the capital account balance.

A. Foreign goods are now relatively more expensive. British consumers are hurt. Makes them worse off.

How does a fall in the value of the pound sterling as shown in the diagram to the right affect British​ consumers? A. Foreign goods are now relatively more expensive. British consumers are hurt. B. Domestic goods are now relatively more expensive. British consumers are hurt. C. Domestic interest rates increase. British consumers find it more expensive to borrow. D. Foreign goods are now relatively cheaper. British consumers will benefit. How does this fall in the value of the pound affect American​ exporters? ________

C. A futures contract.

If a contract contains a promise that a specified amount of foreign currency will be delivered on the specified date in the​ future, this​ is: A. A spot contract. B. A foreign exchange option. C. A futures contract. D. A swap. E. A forward contract.

D. American goods would be cheaper for Europeans.

If the U.S. dollar depreciates in terms of the​ Euro: A. The relative price of U.S. exports would rise. B. Americans would have to pay fewer dollars for one Euro. C. European goods would be cheaper for Americans. D. American goods would be cheaper for Europeans.

1 (First express the price of bratwurst in​ dollars, then divide it by the price of hot dogs.) [(1.20 x 5)/6] 1.3 [(1.60 x 5)/6] less (check answers 1&2s correlation and do opposite)

In Munich a bratwurst costs 5 ​euros; a hot dog costs ​$6.00 at​ Boston's Fenway Park. At an exchange rate of ​$1.20​/per ​euro, what is the price of a bratwurst in terms of hot​ dogs? The relative price of bratwurst is ___ hot dogs ​ All else​ equal, how does this relative price change if the dollar depreciates to ​$1.60​? Now the relative price of bratwurst is ___ hot dogs Compared with the initial​ situation, a hot dog has become ___ expensive relative to a bratwurst.

D. a current account deficit.

In an open economy holding GNP and consumption spending constant and where private savings equals domestic​ investment, a government budget deficit must be matched by A. a current account balance. B. a positive difference between domestic exports and imports. C. a current account surplus. D. a current account deficit.

D. It is impossible to tell without a general equilibrium model. B. No, because we cannot tell what general equilibrium effects will be.

Private saving can be given by the following​ equation: Sp=I+CA+(G−T). This equation can be rewritten​ as: CA = Sp−I+(T−G). ​Nowadays, some people recommend restrictions on imports from China​ (and other​ countries) to reduce the American current account deficit. How would higher U.S. barriers to imports affect private​ saving, domestic​ investment, and government​ deficit? A. It will increase investment. B. It will certainly reduce private savings. C. It will reduce government budget deficit. D. It is impossible to tell without a general equilibrium model. Do you agree that import restrictions would necessarily reduce a U.S. current account​ deficit? A.Yes, because it will reduce imports. B.No, because we cannot tell what general equilibrium effects will be.

rise

Suppose the equilibrium exchange rate is determined by the Uncovered Interest Parity​ (UIP) condition. The graph on the right depicts the dollar return on a dollar asset. ​1) On the same​ graph, using the​ 3-point curve tool​, draw the initial dollar return on a euro asset and label it ​"ER€​." ​2) Using the point drawing tool​, label the initial equilibrium​ "A". Now suppose the traders in asset markets suddenly learn that the interest rate on dollars will fall in the near future. Use the diagram on the right to show the effect on the current ​dollar/euro exchange​ rate, assuming current interest rates on dollar and euro deposits do not change. ​3) Using the​ 3-point curve tool​, shift any lines. Label the new line ​"ER€^2​". ​4) Then, using the point drawing tool​, show the new equilibrium exchange​ rate; label the new equilibrium point​ "B". As a result of this​ change, the equilibrium exchange rate​ (dollars per​ euro) will _____.

B. 13 percent

Suppose the return on a European bond is 22 percent per year. If we expect the US dollar to depreciate with respect to the euro by 1111 percent in the next​ year, what is the expected dollar return on this European​ bond? A. 11 percent. B. 13 percent. C. 2 percent. D. −9 percent.

33.3, 40, $120, $20 C. ​rise, causing the British pound to rise in value against the dollar. The British pound would appreciate against the dollar until the price of a zloty would be exactly the same whether it was purchased directly with dollars or indirectly through British pounds.

The fact that we can derive the British pound​/Polish zloty exchange​ rate, say, from the ​dollar/pound rate and the ​dollar/zloty rate follows from ruling out a potentially profitable arbitrage strategy known as triangular arbitrage. As an​ example, suppose that the British pound price of a zloty was below the British pound price of a dollar times the dollar price of a zloty​, as depicted by the hypothetical data in the following table. Exchange Rate Value British pound price of a zloty 2.0 British pound price of a dollar 0.80 U.S. dollar price of a zloty 3.00 Using​ $100 to purchase the Polish currency directly would obtain ____ zlotys. Instead of buying zlotys ​directly, an arbitrager may first buy British pounds and then use these funds to purchase zlotys. In this​ case, an outlay of​ $100 will obtain ____ zlotys. These newly obtained zlotys may then be used to purchase ​____ ​, yielding the arbitrager a profit of ​____. ​ As​ traders/investors pursue this riskless profit​ opportunity, it will quickly disappear since their actions will cause the demand for British pounds from people who hold dollars to A. fall, causing the British pound to fall in value against the dollar. The British pound would depreciate against the dollar until the price of a zloty would be exactly the same whether it was purchased directly with dollars or indirectly through British pounds. B. ​rise, causing the British pound to fall in value against the dollar. The British pound would depreciate against the dollar until the price of a zloty would be exactly the same whether it was purchased directly with dollars or indirectly through British pounds. C. ​rise, causing the British pound to rise in value against the dollar. The British pound would appreciate against the dollar until the price of a zloty would be exactly the same whether it was purchased directly with dollars or indirectly through British pounds. D. fall, causing the British pound to rise in value against the dollar. The British pound would appreciate against the dollar until the price of a zloty would be exactly the same whether it was purchased directly with dollars or indirectly through British pounds

*On OneNote

The following report appeared in the New York Times on August​ 7, 1989: ​"But now the sentiment is that the economy is heading for a​ 'soft landing,' with the economy slowing significantly and inflation​ subsiding, but without a recession. This outlook is good for the dollar for two reasons. A soft landing is not as disruptive as a​ recession, so the foreign investments that support the dollar are more likely to continue. ​Also, a soft landing would not force the Federal Reserve to push interest rates sharply lower to stimulate growth. Falling interest rates can put downward pressure on the dollar because they make investment in​ dollar-denominated securities less attractive to​ foreigners, prompting the selling of dollars. In​ addition, the optimism sparked by the expectation of a soft landing can even offset some of the pressure on the dollar from lower interest​ rates." Using the graph on the​ right, show how lower interest rates can put downward pressure on the dollar. ​1) Using the line drawing tool​, show how lower interest rates can put downward pressure on the dollar. Properly label this line. ​2) Using the point drawing tool​, show the new equilibrium. Label the new equilibrium​ "B".

​$5400. $200. $5600. In a closed​ economy: Private Savings​ = Y​ - C​ - T Government Savings​ = T​ - G Investment​ = Private Savings​ + Government Savings (Y = GNP) Investment = (Y-C-T) + (T-G)

We have the following data for a hypothetical closed​ economy: GNP​ = ​$14,000 Consumption​ (C) = ​$7,200 Government Purchases​ (G) = ​$1,200 Tax Collections​ (T) = ​$1,400 What is the value of private savings SP​? ​ ​ What is the value of government savings Sg​? ​ ​ In this closed​ economy, what must be the value of investment​ expenditure? ​

$900, $100 computations Total Savings​ = Private Savings​ + Public savings​ = I​ + CA, where CA​ = GNP-C-I-G

We have the following data for a hypothetical open​ economy: GNP​ = ​$10,000 Consumption​ (C) = ​$7,500 Investment​ (I) = ​$800 Government Purchases​ (G) = ​$1,600 Tax Collections​ (T) = ​$1,200 What is the value of total savings​ S? ​ What is the value of the current account balance​ CA? ​

$1600 computations: The national income of an open economy is therefore the sum of domestic and foreign expenditure on the goods and services produced by domestic factors of production.​ Thus, the national income identity for an open economy​ is: Y​ = C​ + I​ + G​ + EX​ - IM. basically, C+I+G - GNP (In that order)

We have the following data for a hypothetical open​ economy: GNP​ = ​$12,000 Consumption​ (C) = ​$8,000 Investment​ (I) = ​$1,200 Government Purchases​ (G) = ​$1,200 What is the value of the current account​ balance? ​

rise, depreciation, appreciation

We noted that we could have developed our diagrammatic analysis of foreign exchange market equilibrium from the perspective of​ Europe, with the​ euro/dollar exchange rate E€/$=1/E$/€ on the vertical​ axis, a schedule vertical at R€ to indicate the euro return on euro​ deposits, and a​ downward-sloping schedule showing how the euro return on dollar deposits varies with E€/$​, as shown on the graph to the right. ​1) Using the line drawing tool​, show the effect of a decline in the interest rate on euro deposits. Label the new line R€^2. ​2) Using the point drawing tool​, locate the new equilibrium point. Label this point​ "B". As a result of this​ shock, the equilibrium exchange rate E€/$ will _____​, which corresponds to euro _____and to a dollar _____.

C. A difference between the exchange rates in different trading centers.

What is the​ "arbitrage" opportunity in the foreign exchange​ market? A. A difference between the exchange rate for buying and selling the currency from the same bank. B. A​ cross-rate. C. A difference between the exchange rates in different trading centers. D. A fee that brokers charge for trading currency of their clients.

A. Future account.

Which of the following is NOT an account in the balance of​ payments? A. Future account. B. Current account. C. Capital account. D. Financial account.

American (domestic) products. When the dollar is weaker. When the dollar is stronger.

hen the dollar is worth less in relation to currencies of other countries ​(for example relative to the Japanese Yen in the diagram to the right​), are you more likely to buy​ American-made or​ foreign-made electronics? _______ Are U.S. companies that manufacture​ semi-conductors happier when the dollar is strong or when it is​ weak? _______ What about an American company that is in the business of importing electronic consumer goods into the United​ States? ________