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# psoln2 - Professor S McCafferty Practice Problems II...

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Professor S. McCafferty Practice Problems II Solutions 1. Assume the following Balance of Payments statistics for a hypothetical country: Current Account Net Exports Exports 60 Merchandise 40 Services 20 Imports -40 Merchandise -35 Services -5 Net Income from Assets Income Receipts on Investments 10 Income Payments on Investments -5 Net Unilateral Transfers -5 Capital and Financial Account Increase in U.S.-owned Assets Abroad U. S. Official Reserve Assets 5 Other U.S. Assets -40 Increase in Foreign-owned Assets in U.S. Foreign Official Assets 0 Other Foreign Assets 10 Statistical Discrepancy ? a.) Calculate the Merchandise Trade Balance. Merchandise Exports - Merchandise Imports = 40 - 35 = 5 b.) Calculate Net Exports. NX = Exports - Imports = 60 - 40 = 5 a.) Calculate the Official Settlements Balance. OSB = Increase in U.S. official reserve assets - increase in foreign reserve assets = -5 - 0 = -5

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d.) Calculate the Capital Account Balance. KFA= 5 - 40 + 0 + 10 = -25 e.) Calculate the Statistical Discrepancy. SD = -(CA + KFA) = -(20 - 25) = 5 2. For this problem, assume that the domestic price level is equal to \$12 and that the foreign price level is equal to £ 2.00 (£ is the symbol for British Pounds, the U.K. currency). Also assume, for parts a, that the real exchange rate is equal to 1.5. a.) Calculate the nominal exchange rate of the dollar with respect to the British Pound. Show your calculation. \$ £ 25 . 0 12 \$ 0 . 2 £ ) 5 . 1 ( = × = × = = nom For nom For nom e P P e e P P e e b.) Suppose that the U.S. and British price levels remain constant. What nominal exchange rate between the U.S. dollar and the British Pound would correspond to Purchasing Power Parity ? Explain briefly. \$ £ 167 . 0 12 \$ 0 . 2 £ ) 0 . 1 ( e 1 e nom = × = = 2
3. For this problem, assume that the United States is a large open economy. Also assume that U.S. and Rest of the World assets are perfect substitutes. a.) In the graphs below, show the effects of a temporary increase in U.S. government spending. Does this disturbance move the domestic (U.S.) economy in the direction of a current account deficit or surplus? What are the effects on domestic saving and investment?

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