ECON_104_Homework_07.pdf - Homework 07 Econ 104 WC Sec 3...

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Unformatted text preview: 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 Homework 07 Due Apr 21 at 11:59pm Points 100 Questions 26 Available until Apr 22 at 4am Time Limit None Instruc ons Homework 07 Lesson 12 100 points This homework is composed of multiple choice, graphing and true/false questions. Select or enter your responses for each question. There is no time limit. It will be available for review starting the day after the assignment is due. This quiz was locked Apr 22 at 4am. A empt History LATEST Attempt Time Score Attempt 1 253 minutes 100 out of 100 Score for this quiz: 100 out of 100 Submitted Apr 18 at 7:53pm This attempt took 253 minutes. Part 1: Short answer question: Question 1 is worth 20 points. Question 1 20 / 20 pts Explain, in five sentences or less, exactly why the trade deficit in the US increased from 1995 to 2000. There are two specific reasons. Make sure you explain clearly (the intuition) why each reason would add to our trade deficit. 1/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 Your Answer: 1) The financial crises in East Asian and Russian resulted in the appreciation of the US dollar as many viewed the dollar as a safe haven. The stronger dollar then made imports relatively cheaper, thus imports increased. It also made exports more expensive, thus they decreased. 2) The growth of the US economy relative to the rest of the world, increased our appetite for foreign goods. Part 2: Multiple choice questions: Questions 2­4 are worth 5 points each. Question 2 5 / 5 pts Suppose that you received your college degree from Penn State and nailed a great job over in Europe in the summer of 2006. Given that your family remains in the US, you make sure that you visit the family every September by traveling from Europe to the US. We are going to compare the cost of this vacation, in terms of euros, during two different periods: September 2007 and September 2017. We assume that the cost of the trip, in terms of $ US, remains the same at $1,000 in both periods. Using the data below, we will compare the euro cost of the trip in September 2007 vs. the euro cost of the trip in September 2017. Data: 9/1/2007 the $ per euro exchange rate is $1.39 per euro 9/1/2017 the $ per euro exchange rate was $1.19 per euro What was the cost of the trip in 2007 measured in euros? 1,390.00 euros 1.19 euros Correct! 719.42 euros 2/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 1,000.00 euros Question 3 5 / 5 pts What was the cost of the trip in 2017 measured in euros? 1.39 euros 781.00 euros 1,000.00 euros Correct! 840.34 euros Question 4 5 / 5 pts What happened to the value of the dollar between 9/1/07 and 9/1/17? it became weaker the value was constant Correct! it became stronger Part 3: Short answer and graph questions: Questions 5 and 6 are worth 25 points total. 3/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 Question 5 10 / 10 pts Using the data below, we are now going to use our supply/demand framework for US $ to model the movement in the euro per $ exchange rate between December 2007 (the very beginning of the Great Recession) and November 2008 (pretty much the height of the global financial crisis). Note that the data is given in $ per euro and then converted into euro per dollar. For example, $ 1.2 per euro is converted by 1/1.2 = .833 meaning that $1 = .83 euro (this is the vertical axis on your graph, i.e., euro per $). HAND DRAW a supply and demand diagram like we did numerous times in the lectures labeling the vertical axis as euro per $, the horizontal axis with Quantity of dollars, the initial supply and demand curves labeled with 12/07, Label this initial intersection point as point A. Then you will explain what happened to each curve and WHY between 12/07 and 11/08. Label as point B with your supply and demand curves labeled accordingly (Hint: the two obvious facts during this period is that the 1) US was in a deep recession and 2) we were at the height of the (global) financial crisis (in 11/08). Assume all else is constant. Data: 12/1/2007 the dollar per euro exchange rate is $1.45, so the euro per dollar exchange rate is 1/1.45 = .69 euros per dollar. 11/1/2008 the dollar per euro exchange rate is $1.27, so the euro per dollar exchange rate is 1/1.27=.79 euros per dollar. Epp_HW_7.pdf ( ) Question 6 15 / 15 pts Summarize and explain what happened (and why) in your graph between 12/07 and 11/08 Your Answer: The US recession had lowered the supply of US dollars, with all else constant would result in the dollars appreciation. With the financial crisis the 4/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 safe haven theory that people would trade in foreign currency for US dollars would soar, seeking safety in the dollar a its denominated assets like bonds. Part 4: True/false questions: Questions 7­26 are worth 2 points each. Question 7 2 / 2 pts In a open economy, savings = investment is the same as the closed economy goods market equilibrium condition we know as Y = C + I + G. True Correct! False Question 8 2 / 2 pts If income exceeds absorption, then the economy is 'consuming beyond its means.' True Correct! False Question 9 2 / 2 pts 5/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 In the open economy goods market equilibrium with two large countries, the sum of the absorptions must equal the sum of the incomes produced by the two countries. Correct! True False Question 10 2 / 2 pts Goods market equilibrium in an open economy requires that savings equals investment. True Correct! False Question 11 2 / 2 pts If savings exceeds investment then the country is running a trade deficit where NX < 0. True Correct! False Question 12 2 / 2 pts 6/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 If NX is positive then the country is consuming beyond their means and must borrow from the rest of the world. True Correct! False Question 13 2 / 2 pts During the mid 2000s, the current account deficit in the US exceeded 10% of GDP. True Correct! False Question 14 2 / 2 pts We argued that when the economic growth in the US is greater than the (economic) growth rates of our trading partners, the trade deficit in the US should get smaller, all else constant. True Correct! False Question 15 2 / 2 pts 7/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 A country that intervenes in the foreign exchange market to keep their currency weak is consistent with the country being export oriented. Correct! True False Question 16 2 / 2 pts We argued that when the US economy grew briskly during the new economy, the supply of US dollars in exchange for other currencies rose since along with economic growth, our appetite for imports grows as well. This effect, all else constant, would weaken the value of the $. Correct! True False Question 17 2 / 2 pts We argued that the E. Asian and Russian crises would map to our foreign exchange market analysis as a decrease in the supply of dollars resulting in a stronger US dollar. True Correct! False Question 18 2 / 2 pts 8/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 During the Reagan Administration, the current account became a major economic issue. In particular, the US began running a large current account surplus where US exports were much larger than US imports. True Correct! False Question 19 2 / 2 pts Export oriented countries prefer a weaker currency relative to a stronger currency. Correct! True False Question 20 2 / 2 pts If there is pressure for the Chinese yuan to appreciate against the US dollar, then China can 'fight' this appreciation by buying $ with their yuan. Correct! True False Question 21 2 / 2 pts We argued that one reason that interest rates are low on government securities is due to China's exchange rate regime. 9/11 4/29/2019 Correct! Homework 07: Econ 104 WC Sec 3 Spring 2019 True False Question 22 2 / 2 pts Monetary policy is thought to be stronger in an open economy relative to a closed economy since if the Fed, for example, wanted to prevent the economy from overheating, they would lower interest rates. Along with the normal closed economy impact on consumption and investment, we also would have a stronger dollar which would lower net exports, adding to the power of monetary policy. True Correct! False Question 23 2 / 2 pts One reason fiscal policy is thought to be stronger in an open economy relative to a closed economy is due to the fact that in an open economy setting, the change in the interest rate effects the exchange rate and thus, adds power to fiscal policy through this exchange rate channel. True Correct! False Question 24 2 / 2 pts 10/11 4/29/2019 Homework 07: Econ 104 WC Sec 3 Spring 2019 A rush to the safe haven of $ US during a financial crisis is depicted in the supply/demand model in the $ US market as an increase in the demand to exchange foreign currencies in for $. The end result should be $ US appreciation, all else constant. Correct! True False Question 25 2 / 2 pts We argued that the $ US was appreciating in the early years of the Reagan Administration due to the contractionary fiscal policy during this time. True Correct! False Question 26 2 / 2 pts When people refer to the twin deficits in the US they are most likely referring to the new economy years since this was the time twin deficits occurred in the US economy. True Correct! False Quiz Score: 100 out of 100 11/11 ...
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