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homework 3 - Econ 716-21 Macroeconomics for Finance Lau...

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1 Econ 716-21 Macroeconomics for Finance Lau Problem Set III Fall 2010 Instructions: 1. Answer all questions. (4 pages long) 2. Please form study group of up to 3 persons and work on the problem set. 3. Show your formulas and steps clearly. 4. Due date: 11/8/2010 (M) @8am Part I Multiple Choice (7 questions; 3 points each) 1. In a small open economy with perfect capital mobility, if the domestic interest rate were to rise above the world interest rate, then ______ would drive the domestic interest rate back to the level of the world interest rate. A. capital inflow B. capital outflow C. the central bank D. the banking system 2. If purchasing power parity held, if a Big Mac costs $2 in the United States, and if 6 French francs trade for $1 then a Big Mac in Paris should cost 3. Most economists believe that prices are
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