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This is a long mid-term, all questions (1a, 1b, etc) are weighted equally. Skip questions that are taking you more than a couple of minutes. Questions with an ** are “Bonus” questions, answering them does not give you points but instead indicates that the rest of the questions do no challenge you enough. Feel free to ask if you have any questions about the exam. Lastly, if you need to make assumptions in order to answer the question, state those assumptions and then answer the question. 1.a When are savings and investment equal in an open economy? Savings are defined as S=Y-C-I-G=I+CA. They are equal to investment when CA=0 or X=Im. 1.b Mark which entries in the following table should reflect each transaction: Transaction Y G C I X Im Purchase of a car ride from a Canadian friend. X X Interest paid by your Canadian friend on his credit card to an American bank. (Hint: An interest payment is the rent paid for the use of capital.) X X You are consuming an imported ride from a Canadian national. He (a Canadian National) is importing from the US the use of capital which belongs to a US firm. 1.c Account for the second transaction above in terms of US and Canada’s international accounts. America Canada Debits Credits Debits Credits Current A. Service provision: loan of capital. Import of the use of capital. Capital A. Financial A. Receipt of interest payment on the loan. Interest payment on the loan. 1.d To respond to the current economic crisis Democrats in congress propose an increase in government spending saying that would increase investment and output. Choose numbers for Y, G, C, I X and Im, which reflect that proposal, but also that output doesn’t increase as much as government spending. Y G C I X Im Current 12 2 9 2 2 3 Proposal Any numbers with Y>12, G>2, I>2 and that fulfill the identity Y=C+I+G+CA are correct. 1.e Suppose that given the crisis, more men and women stay at home doing house work. Would that make official GDP figures be lower or higher than what is really produced in the US? X Lower because …official accounts do not track house work as accurately as “market place” work. Higher because … 2.a If E $/Y =2, how many Yen can I buy with 5 dollars? I can buy ___2.5_______ Yen. The definition of an exchange rate implies that Y=$/ E $/Y where Y is the number of Yen you get for $, the number of dollars. 2.b If a Carlson student’s hourly wage is 30$ after graduation compared to $20 for a non-Carlson student, what is the exchange rate between Carlson student hours and non-Carlson student hours? The E C/NC =___0.66_____ In other words, you only need 2/3 of a Carlson student hour to buy a non-Carlson student hour. 2.c What is the expected one year return in dollars of buying $100 of Yen bonds that pay 3% interest rate if the Yen is expected to depreciate 2%?
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Return = _____1%______ or ____101___ dollars If the Yen depreciates 2%, my investment in Yen looses 2% of its value in Dollars, but it gained 3% in Yen so overall I get 1%. 2.d In that case what should the return on an investment of $200 in US bonds be?
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This note was uploaded on 12/23/2009 for the course DEST 320 taught by Professor Singha during the Spring '09 term at Academy of Design Tampa.

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Upload - This is a long mid-term, all questions (1a, 1b,...

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