AnswerKey for TERM TEST 1 PART B FALL 2010

AnswerKey for TERM TEST 1 PART B FALL 2010 - Economics 3H03...

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Fall 2010 Term Test 1 Solutions October 11, 2010 (Prof. Krishnakali SenGupta) 1. (1a) (3 marks) With CA = EX - IM < 0 and knowing the relation External Wealth = External Assets - External Liabilities , External Wealth will be negatively affected, i.e. External Wealth will go down, because the county’s External Liabilities are on the rise to cover the CA deficit. ( 1.5 marks ) If the home country declared bankruptcy External Liabilities = 0 and now the above relation becomes External Wealth = External Assets and thus the external Wealth goes up after the home country declares bankruptcy. ( 1.5 mark ) (1b) (3 marks) At what US exchange rate for the Euro is the price of the ale the same in both countries when measured in a common currency? ( 1.5 points ) Version 1 $2 = E $ / e × e 3 E $ / e = 2 3 = $0 . 667 Version 2 $5 = E $ / e × e 3 E $ / e = 5 3 = $1 . 667 Version 3 $5 = E $ / e × e 2 E $ / e = 5 2 = $2 . 5 Two marks were deducted for not getting the right exchange rate. For example, in
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This note was uploaded on 12/02/2010 for the course EC 3h03 taught by Professor Gupta during the Spring '10 term at McMaster University.

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AnswerKey for TERM TEST 1 PART B FALL 2010 - Economics 3H03...

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