PSLecture10 - Problem Set for Lecture 10: The International...

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Problem Set for Lecture 10: The International Debt Crisis: A Decade of Lost Growth In Latin America [November 24, 2009] Note: Questions marked with a T may be discussed during tutorials and tests. 10.1 “Kyle observes the differences between a country with a fixed [pegged] foreign-exchange rate regime and a country with a flexible foreign-exchange rate regime. In the former case, the country establishes a fixed rate of exchange for its own currency against another country [usually the United States]. Kyle indicates that this fixed exchange rate is maintained as the country [or its central bank] buys or sell its own currency, as necessary, to preserve the fixed foreign-exchange rate. Kyle reports that a country with a fixed foreign-exchange rate will either have a balance-of-payments deficit or a balance-of-payments surplus each year. Kyle also indicates that in a country with a flexible foreign-rate regime, market forces will cause the country’s foreign-exchange rate to rise and fall through the impact of all transactions between residents and non-residents.” T10.2 “Kathy notes that the balance-of-payments statement for a country is a summary of the transactions between residents of the country and non-residents for a specified period of time. Kathy also understands the accounting system used: a credit transaction is one which would bring foreign exchange into the country and a debit transaction is one in which foreign exchange would leave the country. Kathy reviews the entries in a hypothetical economy with a fixed foreign-exchange rate regime and finds the following summary of transactions on current account for the last month: a. trade account: $200,000 worth of exports and $250,000 worth of imports; b. interest payments: $40,000 credits and $80, 000 debits. Kathy concludes that this country had an unfavourable balance on current account of $90,000.” T10.3 “Kelly also reviews the previous country’s international trade and financial flows. Kelly starts with the preceding current account transactions as stated in Question 10.2. Kelly notes that this country also had a capital inflow of $70,000 and a capital out flow of $22,000 for foreign direct investment last month. In addition, Kelly finds that there were $50,000 worth of credits and
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This note was uploaded on 12/22/2010 for the course ECO ECO105 taught by Professor Hare during the Spring '08 term at University of Toronto- Toronto.

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PSLecture10 - Problem Set for Lecture 10: The International...

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