11 Jun Economics–Introduction International Econ Relations
1)- Suppose you are asked to advise a risk-avert individual who is to invest $50 million for one year either in the U.S. or in U.K. Given the following information, where would you advise her/him to invest? iu.s. = 5%; iu.k. = 4%; Spot exchange rate =1.5 dollars per pound; and the one year forward exchange rate = 1.3 dollars per pound.
– Let the following equations represent a model of an economy.
1. Y = C + I + G + X – M
2. C = 200 + 0.8Y
3. I = 100
4. G = 200
5. X = 150
6. M = 50 + 0.05Y
a. How much is equilibrium income and open economy multiplier?
b. How much is consumption, saving, and imports at equilibrium level of income?
c. Is the balance of payments in surplus or deficit?
d. By how much do we need to change G in order to have a balance of payments
equilibrium?
e. What will be the impact on Y and the trade balance if exports increase by 10 (say
due to an increase in foreign demand) and Fed cuts the discount rate which results
in an increase in investment by 10 and an increase in autonomous consumption by
10.
2)- Consider the following model and again answer related questions.
1. Y = C + I + G + X – M
2. C = 300 + 0.50Y
3. I = 600 – 1000r
4. G = 200
5. X = 100
6. M = 100 + 0.25Y
a. How much is equilibrium level of income or output if Fed decides to set the rate
of interest at 10 percent (r=0.10).
b. In an effort to cool down the economy, the Fed raises the rate of interest to r
=0.15. By how much will Y change?
c. To coordinate the fiscal and monetary policies, assume government decides to
balance the budget by cutting its spending by 100 and at the same time Fed
decides to counter the contractionary effect of cutting spending and lowers the
rate of interest to r = 0.05. Can you predict the change in Y?
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