PS4 - METU / FEAS / Department of Economics Econ 354:...

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1 METU / FEAS / Department of Economics Econ 354: Introduction to International Economics II / Spring 2010 Student assistants: Merve Mavu ş ğ lu ([email protected]) Course assistant: Seda Ekmen ([email protected]) Instructor: Emre Özçelik ([email protected]) Problem Set # 4– Chapter 23 PART A: TRUE-FALSE QUESTIONS 1) Assuming a current account deficit, an increase in the exchange rate (depreciation of the home currency) causes foreign goods to become less expensive, leading the home country to increase imports and to decrease domestic alternatives. (T/F) 2) The adjustment to changes in relative prices brought about by changes in the exchange rate is called the price adjustment mechanism. (T/F) 3) In an unstable market, excess demand will occur below the equilibrium price. Consequently, the increase in price caused by excess demand brings the market back to equilibrium. (T/F) 4) Market stability occurs when the characteristics of supply and demand are such that any price deviation away from equilibrium sets in motion forces that move the market back toward equilibrium. (T/F) 5) Stability does not ensure that home currency depreciation will remove an excess demand for foreign exchange and currency appreciation will remove an excess supply of foreign exchange. 6) Exchange rate pass-through can be defined as the degree of sensitivity of import prices to a one percent change in exchange rates in the importing nation’s currency. (T/F) PART B: FILL IN THE BLANKS 1) Suppose that there are two countries and home country is running a current account deficit. The home-country currency will ; that is to say, the price of foreign currency in terms of home currency will tend to . In the country, the volume of will tend to fall as the foreign goods become in terms of home currency; but the volume of exports will tend to as home country goods become cheaper in the currency. 2) The effect of home-currency depreciation on the trade balance of the home country depends on the ____ of import-demand and export-supply. 3) When the sum of the absolute values of elasticities of demand for imports and demand for exports (from the viewpoint of the home country) is than unity, then appreciation of home currency will home currency’s balance of trade. 4) Depreciation of home currency will the current account deficit, when each country’s elasticity of demand for imports is zero; that is to say, each country’s demand-for-imports schedule is . This situation implies that the Marshall-Lerner condition is _____.
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2 5) If exporters base their prices on and do not adjust prices for changes in the exchange rate, one would not observe price/cost ratios moving in sympathy with changes in the exchange rate. In such a situation, is said to occur, meaning that the exchange rate change is allowed to register its full impact on the foreign consumer price of the good. 6)
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This note was uploaded on 05/26/2010 for the course ECON 354 taught by Professor Emre during the Spring '10 term at Middle East Technical University.

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PS4 - METU / FEAS / Department of Economics Econ 354:...

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