Econ 353-2009Fall-PS 2 - METU/FEAS Econ 353 Hakan ERCAN...

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METU/FEAS 03.11.2009 Econ 353 Hakan ERCAN Tuna GONULDAS Gorkem KARABAYIR PROBLEM SET 2 PART A: MULTIPLE CHOICE QUESTIONS 1) Exchange rate limits describe; a) the degree to which a trading partner’s monetary policies can be considered as “fair”. b) the exchange rate that should prevail in a country (given the wage rates of the countries) for trade to be advantageous. c) the maximum value of the exchange rate before triggering devaluation. d) The end points of the range within which the exchange rate can vary without eliminating the basis for trade. 2) On which of the below does the ability to export depend? 3) It is given that 1 1 2 2 j j a w e a w < � � is export condition for country 1. a 1j : the labor requirement of country 1 for commodity j. a 2j : the labor requirement of country 2 for commodity j w 1 : wage rate in country 1 (in its own currency) w 2 : wage rate in country 2 (in its own currency) e : country 2’s currency / country 1’s currency Which of the following statements are true? I- A fall in w 1 reduces the relative cost competitiveness of country 2. II- An increase in w 2 enhances the cost competitiveness of country 2. III- A rise in e offsets some of country 1’s initial relative labor efficiency. 1
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IV- A fall in e increases the cost advantage of country 2. a) only I b) I and II c) I and III d) I, III and IV Use the following table to answer Questions 4 – 6 Country Wage per day Days per unit of output Silicon chips Rice Bangladesh 30 takas 20 5 Pakistan 40 rupees 10 6
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