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ECON303 Economics Midterm #3 (A) November 22, 2010
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You are permitted
to only have a writing utensil, a non-programmable with you during the exam; Answer all
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questions fully. Show your work for credit. Be sure to label all curves and points on graphs.
If you feel a graph is appropriate
for a question, include
one with your answer, even if not explicitly asked for. Be sure to fully discuss your answers.
Good Luck!!
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1. (20 Points) The one-year interest rate in Singapore is 12 percent. The one-year interest rate in
the U.S. is 8 percent. The spot rate of the Singapore dollar (S$) is $.50 and the forward rate of the S$ is $.45. Assume zero transactions costs. (a) (10 Points) Does interest rate parity exist?
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2 2. (l0 Points) In 1990, the price level for Pacifica was 100, the price level for Atlantica was also 100, and in the foreign exchange market I Pacifica pound was equal to I Atlantica mark. In 2000, the price level in Pacifica had risen to 2S0 and the price level in Atlantica had risen to SOD.
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3. (10 Points) Explain why increasing government spending deteriorates the trade balance.
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4 4. (20 Points) Draw a graph of the supply of and demand for the Japanese Yen by the U.S. market. Diagram the effect of each of the following on the exchange rate, state in words whether the effect is long, medium, or short run, and explain your reasoning.
A) (5 Points) An economic recession in the U.S.
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D) (5 Points) Expectation of a future depreciation in the US dollar
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5. (I 0 Points) Describe the mechanism that leads from a change in monetary policy to changes in interest rates, the exchange rate, and the current account balance. Consider contractionary monetary policy.
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