02 Jun Question 1. Suppose household saving is $20, the government
Question
1. Suppose household saving is $20, the government spending deficit is $4, and investment is $20.
a. What is national saving? b. What are net exports?
c. What is net capital outflow?
d. Does your answer to c indicate that the US
is a net lender or a net borrower in international financial markets?
2. Suppose that an automobile costs $30,000 in the United States and 25,000 Euros in France. Further suppose that the exchange rate is .8 (one US dollar = .8 Euros).
a. What is the real exchange rate?
b. In which country is the automobile less expensive?
c. Do your answers suggest that the US will have a trade surplus or a trade deficit with France?
d. Does you answer to c suggest that US citizens will be borrowing money from France or
lending money to France?
e. Given the prices of the automobiles in France and the United States, what should the nominal exchange rate be in order to have purchasing power parity
3. If the inflation rate is 15% in France and 4% in the US,
a) what is the percentage change in the exchange
rate assuming there is purchasing power parity?
b) your answer to a implies that the international
value of the dollar is (rising, falling).
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