final03_sol - Pierre-Olivier Gourinchas Department of...

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Pierre-Olivier Gourinchas Econ182 Department of Economics International Monetary Economics UC Berkeley Fall 2003 Final examination Instructions : This is a 3hour exam with 6 questions worth a total of 180 points (1 point per minute), as indicated at the start of each question. In order to get full credit, you must give a clear, concise, and correct answer, including all necessary explanations. Calculators, books and notes are not permitted. Use this exam copy for question 1. Use bluebooks for questions 2-6 Please don’t forget to write your name on each copy of your exam. Good luck! Last Name: First Name:
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International Monetary Economics, econ182 Fall 2003. Page:2 WRITE YOUR ANSWERS TO QUESTION 1 ON PAGES 2-5. 1. [40 points, 5 each] True, False, Uncertain . Explain brie f y your answers, and cite the relevant theories, when applicable. (a) A current account de F cit re f ects the lack of competitiveness of domestic goods and services. It requires a depreciation of the domestic currency in order to stimulate exports and limit imports. FALSE. there are three equivalent interpretations of a current account de f cit: S-I, X-M+NFP and Y-A. eliminating a current account de f cit can be achieved via expenditure reducing policies. (b) In the last two years, China has been running a current account surplus while attracting large private capital in f ows in the form of foreign direct investment [This is a fact; do not discuss]. In order to keep the Yuan from appreciating, the Bank of China had to accumulate large amounts of foreign reserves. TRUE: balance of payment accounting says that CA+KA+NRFA+OR=0. So if CA > 0andNRFA > 0 (assume KA=0), then OR < 0: the BoC must acquire assets. (c) The F nancing of the war in Iraq should increase the U.S. current account de F cit. UNCERTAIN: it depends upon the duration of the war. a transitory war would lead to a larger CA de f cit in the US. A permanent war would not. Answering TRUE is OK, if they point out that a war is transitory (d) As of last week, the annualized 3-month interest rate was 1.05 percent for the United States and 0.02 percent for Japan [This is a fact; do not discuss]. Accordingly, the yen is expected to appreciate against the dollar by 1.03 percent (annualized) over the next three months. TRUE: uncovered interest rate parity. The expected rate of depreciation is DE = i-i*=1.05-0.02=1.03 so the dollar is expected to depreciated by 1.03% (e) According to the World Bank, current GDP per capita in 2002 was close to $1,000 for China and $36,000 for the US [This is a fact; do not discuss]. This implies that the typical US person has 36 times the purchasing power of a typical Chinese person. FALSE. the purchasing power needs to be computed on a PPP basis. China’s
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final03_sol - Pierre-Olivier Gourinchas Department of...

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