PS3 - Department of Economics University of California...

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. . . more Department of Economics Fall 2007 University of California Economics 100B Berkeley Professor Olney Problem Set #3 (15 points possible; 3 percent of course grade) Due: To Your GSI In Section, Monday October 15 or Tuesday October 16 Your answers should be written on the answer sheet provided. Staple your work (on 8½x11 paper) to the back of your answer sheet. You must attach your work or you will receive no points. Be sure to write your section day/time and GSI’s name at the top of the answer sheet. Write your name at the top of every attached page. Late problem sets will be penalized 5 points per day. No problem sets are accepted after the solutions are posted. Your submitted work must be your own: Problem sets that are identical (in whole or in part) to another problem set will receive a score of zero (0). Problem sets should NOT be left in GSI mailboxes. Papers can be stolen from those mailboxes. We are not responsible for problem sets that are not handed directly to your GSI. 1. (3 points total) a. (1 point) Determine, from the perspective of people in the United States , the values of the real exchange rate in Year 1 and in Year 2. Has the real exchange rate increased, decreased, or stayed the same between the two years? Year 1: 1 i costs $1.25, CPI in the U.S. is 100, CPI in Western Europe is 120 Year 2: 1 i costs $1.40, CPI in the U.S. is 105, CPI in Western Europe is 124 b. to Western Europe in Year 2 as in Year 1? Briefly, explain. c. (1 point) Suppose that real interest rates decrease in the U.S. but not in Western Europe. What effect would this decrease in U.S. real interest rates have on the nominal exchange rate between the euro and the dollar? Draw a graph of the market for euros that supports your answer. What effect would it have on the real exchange rate? What effect would it have on gross exports from the U.S. to Western Europe? 2. (2 points) a. (1 point) Suppose you own many shares of stock in ItsMine Corporation. Suppose the annual expected earnings of ItsMine Corporation are $2.10 per share of stock. Suppose your risk premium for this stock is 4 percent. Suppose the real interest rate you could earn on a risk-free financial asset is 3 percent. If the price of a share of this stock is
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PS3 - Department of Economics University of California...

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