202 - PS4 (1).pdf - METU Department of Economics ECON 202...

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1 METU, Department of Economics ECON 202 Section 1 Fall 2016 Instructor: Hasan Cömert T.A.: Ahmet Benlialper PROBLEM SET 4 1- True/False/Uncertain: a. Devaluation is always associated with gains in competiveness. b. The bilateral exchange rate between US and Japan is 124 (1$ can buy 124 ¥) . Therefore, American tourists in Japan find everything very cheap. c. In theory, a financial account deficit necessarily implies a current account deficit. d. In practice, the sum of the measured current account balance and measured capital account balance is always exactly equal to zero. e. Suppose that Turkey has a large current account deficit. Turkey increases the amount of aid it gives to foreign countries. This event will lead to no change in the current account deficit. 2- Suppose that a friend of yours goes to Australia for spring break, and the day before coming back to the US, she calls you to check if you wanted a case of Australian Chardonnay. She tells you that the cost of this case of wine is 100 Australian dollars. Right after you hang up, your sister, who studies in England, calls. Knowing how much you like Chardonnay, she tells you about a deal that she came across: A case of the same quality Chardonnay for 60 British pounds. Both tell you that they will be able to ship you the case at no cost to you. Furthermore, a case of similar quality US made Chardonnay is sold at the liquor store next door for $70 (in US dollars). a. If one US dollar exchanges for 1.5 Australian dollars, how many US dollars will the Australian case of wine cost? b. If one pound exchanges for US$1.20, how many US dollars will the British case of wine cost? c. If you really believe that all three of the wines will taste the same, and if that and price are all that you care about, among all the options, which one will you choose? d. What are the real exchange rates between US-England and US-Australia? Assume for this that wine is the only good that matters. 3- Suppose that Turkey has a large current account deficit. For each of the following (i) (vi) state whether the event will lead to a larger, a smaller, or no change in the current account deficit:
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2 i. People in Turkey start buying more domestically made cars and less foreign made cars. ii. Turkey increases the amount of aid it gives to foreign countries. iii. More overseas students start coming to study in Turkey. iv. The Turkish people start to finance a greater share of their current account deficit selling foreign assets, rather than borrowing from overseas. v. Foreign investors are paid 10 million TL in dividends from their holdings of Turkish public companies. vi. With the conclusion of the war in Iraq, Turkish people start to travel abroad more often. 4- Suppose that the exchange rate is fixed at 10 TL per dollar even though the current exchange rate implied by the market mechanism is 15 TL per dollar. Annual demand for and supply of TL are given as: D=100+5E and S=400-15E where E is the exchange rate defined as TL per $.
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