HOMEWORK - ECON 327 International Economics Prof Wei Ge...

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a b c d P a P o D d S d ECON 327 International Economics Prof. Wei Ge Fall 2006 Homework #4 Due: November 27, 2006 Part 1. Q1. a) The rising domestic price level in Mars relative to that of the US would lead to a “real appreciation” of its exchange rate because the amount of goods able to be purchased for the same amount of M$ would decrease. The purchasing power parity of Mars’s consumers would decrease. b) The real rate appreciation might have taxed agriculture because agriculture tends to be a domestic industry. As the PPP decreases, there is effectively a tax on domestic goods. Because of the increased demand for foreign exchanges (US$), the real rate appreciation would simultaneously subsidize capital good imports. c) The real rate appreciation would decrease US$ earnings, depleting any reserves of US$ held by the Mars government and leading to debt. To keep up with the decrease in reserves, Mars may have to borrow from other countries, increasing their national debt, which could lead to a debt crisis. Q2. I would not be in favor of introducing an antidumping duty as long as the price the Korean companies are charging is higher than the full AC. Since political repercussions in international relations could be worse than any damage to domestic production and economics, it is necessary to analyze fully whether it would be helpful to impose an antidumping duty in this case. However, if an antidumping duty was imposed, it can be analyzed similar to tariff and quota cases.
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