Extra problems 372

EXTRA PROBLEMS

1.1. Make t-accounts for each of the 6 BOP accounts employed in this class (being sure to label all 6) for the US, and make the appropriate entries for each of the following:
(i) Virginian pays German stockholder $10 dividend using a check on a US bank
(ii) US Government buys $20 worth of ¥ in foreign exchange markets with cash (in $)
(iii) NY law firm sells $30 of services to English firm - paid w/check on French bank
(iv) American receives $40 interest payment on Mexican 10-year bond - paid w/ Mexican check
(v) Kenyan buys $50 of US stock from American – pays with London bank check
(vi) Tokyo resident buys $60 of US stock from Australian – pays w/New York bank check

1.2. If CA_G = 5, CA_S = 6, CA_FS = -3, KFA_LP = 4, and KFA_SP = -10, what is the:
(a) KFA
(b) BOP
(c) Basic Balance
(d) Trade balance
(e) CA
(f) KFA_PRIV1.3. If the KFA = 45, Basic balance = -25, and BOP = 5, then what is the:
(a) current account
(b) KFA_SP(c) KFA_LP(d) International Investment Position assuming it was +100 before this activity.

1.4 (a) Make t-accounts for each of the 6 BOP accounts employed in this class (being sure to label all 6) for the US, and make the appropriate entries for each of the following:
(i) New Yorker buys $10 of British stock with a check on a US bank
(ii) Virginian receives $15 dividend from her Japanese stock, paid with check on Japanese bank
(iii) US Government sells $20 worth of yen(¥) in foreign exchange markets (purchasing $)
(iv) Japanese business buys $30 in baseball bats from Kentucky bat producer – pays with check on California bank.
(b) If the International Investment Position was – $50 before the above activity, what would it be afterwards?

1.5 If CA_G = 7, CA_S = 8, CA_FS = -4, KFA_LP = -3, KFA_SP = -5, and KFA_GOV= -3, what is the:
(a) Basic balance
(b) “BOP”
(c) Trade balance
(d) capital and financial account balance

1.6 If the current account is in surplus by 30, the ORTB (“BOP”) is in surplus by 20, and Long Term capital and financial account (KFA_LP) is in surplus by 50, then:
(a) What is the basic balance?
(b) What is the KFA?
(c) What is the KFA_SP?

1.7 (a) Make t-accounts for each of the 6 BOP accounts employed in this class (being sure to label all 6) for the US, and make the appropriate entries for each of the following:
(i) New Yorker who owns an apartment in London receives $10 of rent from British tenant/paid with a check on a London bank
(ii) Virginian purchases 2 year Japanese bond with check for $25 on US bank
(iii) US Fed buys $33 worth of yen(¥) (selling newly printed $)
(iv) German pays Seattle firm $8 for consulting (using a check on a US bank)

(b) If the US was a net creditor by $100 before these four transactions, what would it be after?

1.8 If CA_G = 15, CA_S = 25, KFA_LP = -15, KFA_SP = -20, and KFA_GOV= 5, what is the:
(a) Basic balance
(b) “BOP”
(c) the factor services component of the CA
(d) KFA

1.9 If the capital and financial account is in deficit by 20, the ORTB (“BOP”) is in surplus by 25, and basic balance is in deficit by 12, then:
(a) What is the Long Term capital and financial account (KFA_LP)?
(b) What is the current account?
(c) What is the KFA_SP?

1.10 Given the following transactions:
(i) an Englishman buys $10 worth of art from New York dealer/ pays with check on a Canadian bank.
(ii) US Fed buys $15 worth of yen in foreign exchange markets
(iii) US resident earns $4 interest on 10-yr Japanese bond/pay with check on Tokyo bank
What is the:
(a) basic balance
(b) capital and financial account
(c) “BOP”

1.11 If the International Investment Position was +50 before the activity in the above question, what would it be after?

1.12. (a) Provide an illustration of the $ (foreign exchange) market that recognizes the CA and KFA account components of both the demand and supply for $’s in the case in which the US is running a CA deficit. LABEL EVERYTHING.
(b) State in words (i.e., don’t mess with the diagram in part (a), although you can draw a new diagram if you wish) how an increase in tastes for domestic assets by foreigners would affect the CA (i.e., increase, decrease, or leave it unchanged)?

1.13 What distinguishes Foreign Direct Investment from Portfolio Investment according to Handout #1? (24 words MAX)

2.1 Illustrate a small open economy that is experiencing a KFA surplus (LABELLING EVERYTHING).

2.2 If the world interest rate increases, what happens to a small open economy’s capital and financial account? (concisely explain feeling free to include a diagram).

2.3 (a) Illustrate (using the kind of diagram used in Handout #2 and in class) a small open economy that is running a KFA deficit being sure to label everything (e.g, the investment schedule…).
(b) Illustrate (i.e., add to the diagram) the effect of an increase in the world interest rate.
(c) Given the increase in the world interest rate shown in the diagram, does the economy’s CA rise or fall? Concisely explain why this is so.

2.4 Use a diagram to illustrate a small open economy’s investment and saving schedules when it is clearly running a current account surplus.

2.5 What does an increase in G crowd out in a
(a) small open economy?
(b) large open economy?
(c) closed economy?

2.6. (a) Illustrate (using the kind of diagram used in Handout #2 and in class) a small open economy that is running a KFA deficit being sure to label everything (e.g, the investment schedule…).
(b) Illustrate (i.e., add to the diagram) the effect of an increase in the world interest rate.
(c) Given the increase in the world interest rate shown in the diagram, does the economy’s CA rise or fall? Concisely explain why this is so.

2.7 A small government-less open economy’s only production is from a spring that offers particularly tasty and nutritious water. It produces a dependable $100,000 worth of water each year (that can be consumed or exported). In the past, the country has amassed $400,000 worth of foreign bonds that dependably pay 5%/yr ($20,000/yr) and will do so indefinitely. (Such bonds that never mature and are scheduled to keep paying forever are called “consuls”.) If the country decided now to simply consume its income from this day forth (i.e., without buying or selling its bond holdings), what will be its:
(a) Y (GDP) (b) GNP (c) C (d) S (e) I (f) CA_G+ CA_S (g) CA_FS (h) KFA (i) X - M (j)NFI

3.1. If e has risen from 200 to 208 over a year as e has fallen from 200 to 196, what:
(a) would you predict about inflation in the domestic country (be as specific as you can)
(b) would you predict would happen to the domestic country’s exports in response. Concisely explain. (15 words MAX)

3.2. Using a $ foreign exchange market diagram that breaks down both the demand and the supply of a currency into their CA and KFA components (as done in the handout), illustrate the case where the US is running a KFA deficit (with Japan).

3.3. Given the following information for Countries A,B,C (with currencies a,b, and c, respectively) that only trade with each other, and using 1980 as the base year:
year      e_a/c         e_b/c               CPI_A      CPI_B      CPI_C          X_C_®A M_C_¬A X_C_®B M_C_¬B
1980     27           10               100        100         100             10          20       40        30
1981     30           8                140        130         112             10          20       40        30
(a) What is the e_a/c in 1981?
(b) Did currency c depreciate or appreciate in real terms terms against currency a between these two years, and by how much (in percentage terms)?
(c) What was Country C’s ē for 1981?

3.4. Illustrate, using foreign exchange market diagrams, the effect on an increase in tastes for US goods by Japanese consumers on:
(a) the ¥ market.
(b) the $ market

3.5. If you observed the following exchange rates in the following markets:
New York: ¥120/$         London:   ¥200/£      Tokyo:   £0.60/$
Is there an arbitrage opportunity, and if so, where would the arbitrageurs be buying $? SHOW YOUR WORK!!!!

3.6. Provide an illustration of the $ (foreign exchange) market that recognizes the CA and KFA account components of both the demand and supply for $ in the case in which the US is running a KFA surplus. LABEL EVERYTHING.

3.7. If you are told that a country’s nominal exchange rate has risen by 9% while its real exchange rate has fallen by 2%, state in one clear, concise, complete sentence what information this provides you.

3.8. If you observed the following exchange rates in the following markets:
New York: ¥120/$
London:   ¥180/£
Tokyo:   £0.69/$
Is there an arbitrage opportunity, and if so, where would the arbitrageurs be buying $? SHOW YOUR WORK!!!!

3.9. Use a diagram to illustrate foreign inflation in the foreign country's currency.

3.10. Given the following information for Countries A,B,C (with currencies a,b, and c, respectively) that only trade with each other, and using 1990 as the base year:
year      e_a/c         e_b/c               CPI_A      CPI_B      CPI_C          X_C_®A M_C_¬A X_C_®B M_C_¬B
1990     16            4               100        100         100             20          40       80        60
1994     20         3                150        144         120             20          40       80        60
(a) What is C’s (i.e., c’s) effective exchange rate (ē)? in 1994?
(b) What is the real exchange rate (e) between currencies a and c (in terms of a/c) for 1994.

3.11. If ē was 1.750 in 2000, and 1.925 in 2001, what information does this tell you about the currency between these two years. (BE COMPLETE)

3.12. If you observed the following exchange rates in the following markets:
New York: ¥120/$
London: ¥140/£
Tokyo: £0.80/$
Is there an arbitrage opportunity, and if so, where would the arbitrageurs be buying $? SHOW YOUR WORK!!!!

3.13. Illustrate the effect of Americans’ increased tastes for Japanese assets on the $(foreign exchange) market LABELLING EVERYTHING.

3.14. Given the following information for Countries A,B, and the United States (with currencies a,b, and the $, respectively) that only trade with each other, and using 1999 as the base year:
year      e_a/$         e_b/$               CPI_A      CPI_B      CPI_US       X_US_®A M_US_¬A X_US_®B M_US_¬B
1999     10            8                100        100         100             20          40       80        60
2004     24         9                180        116         120             20          40       80        60
(a) What is the real exchange rate (a/$) for 2004?
(b) Did the $ appreciate or depreciate in nominal terms against b between 1999 and 2004? By how much?
(c) Did the $ appreciate or depreciate in real terms against a between 1999 and 2004? By how much?

3.15. Provide an illustration of the $ foreign exchange market that recognizes the CA and KFA account components of both the demand and supply (as has done in this class) for the case in which the US is running a CA surplus. LABEL EVERYTHING.

3.16. Illustrate the effect of Americans’ increased tastes for southern European Olive Oil on the
(a) $(foreign exchange) market LABELLING EVERYTHING.
(b) euro(foreign exchange) market LABELLING EVERYTHING.

3.17. If e has increased by 5% over the same period of time the real exchange rate (e) has fallen by 2%, what interesting information does this provide you (being as specific as possible using 15 words/numbers MAX)?

3.18 If e has increased by 5% while domestic inflation is 20% and foreign inflation is 9%, what would expect has happened to domestic exports? Concisely state your reasoning (in 20 words MAX)

3.19 If the US conducted 25% of its trade with Canada, and 75% of its trade with Mexico, and the $ appreciated by 20% against the Canadian $ while depreciating by 10% against the Mexican peso, what happened to the US’s effective exchange rate?