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YOUR NAME: YOUR SECTION: TICK ONE BELOW --- SECTION 7 T, H 9:30 – 10:45 PM ---- SECTION 8 T, H 2:00 – 3:15 PM ANSWER SHEET 1.A 2.C 3.B 4.D 5. A 6.E 7.A 8.C 9.A 10.A 11. A 12.A 13.B 14.C 15.A 16.B 17.C 18.D 19.B 20.E
21.A 22. A Useful Equations Note: e refers to the exchange rate of the foreign currency 1. annualized forward premium or discount (F) F = FD/FP = (f – e)/ e * 12/n * 100 where n = # of months in contract 2. covered interest differential (CD) CD = (1 + n abroad ) * f/e – (1 +n home ) 3. covered interest differential approximization CD = F + ( n abroad - n home ) 4. Covered interest parity f / e = [1 + n home ] / [1 + n abroad ] 5. Uncovered Interest differential EUD = (1 + n abroad ) * e ex /e – (1 + n home ) 6. LOOP E = (\$/foreign currency) = (P US of good X )/(P for. Curr.of good X ) 7. Relative purchasing power parity e t /e 0 = (P t /P 0 )/(P t * /P 0 * ) (where * = foreign country) 8. Real Exchange rate a. RER of the foreign currency = (P t f /P 0 f ) * (e t /e 0 ) * 100 (P t d /P 0 d ) b. RER of the domestic currency = (P t d /P 0 d ) * (e 1 t /e 1 0 ) * 100 (P t f /P 0 f ) 9.. PPP and quantity theory of money: e = P/P f = (M/M f ) * (k f /k) * (Y f /Y)

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1. The NAFTA is an example of a(n): a. Free trade area. b. Customs union. c. Common market. d. Economic union. ANSWER: A 2. Trade diversion is likely to be smaller: a. The more elastic is import demand. b. The higher is the country’s tariff rate on the product. c. The lower is partner cost compared to outside-world cost. d. The closer is the partner’s export price to the tariff-inclusive price for imports from countries outside the bloc. ANSWER: C 3. A shortage of pounds in a flexible exchange rate system results in a. a depreciation of the pound b. a depreciation of the dollar c. an appreciation of the dollar d. no change in the exchange rate. ANSWER: B 4. An increase in French residents’ willingness to lend money to U.S. borrowers will shift the demand curve for: a. euros to the right. b. euros to the left. c.
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