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ECON 420 Midterm - UNIVERSITY OF ILLINOIS Department of...

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UNIVERSITY OFILLINOIS Department of Economics Economics 420 / 523 International. Economics Mid-Semester Examination October 20, 2005 Professor W.Baer a) Bretton WoodsSystem .$J Marshall-Lerner conditions .'.- F' Purchasing power parity, ...... _..-.--d) Amortization, ,-~" ~ Offer curve, ,:'\'~"--/ f-) Foreign trade mu1. tipl.ier. ~ i g); Impact of capital. movementon exchange .\.~i Autonomouscapital. movements '" h-!J. ,"~. !.. " ..... . to' :·-.r ImpO--rt;s ~':90;, remi.ttances of citizens l.iV£ngab~oad to families i.n X: 5; premiumpaid -'iO-"foreigninsurance company: 6; credit of IMF :,8 ; amortization payments to banks abroad; 20; exports; 80: l.oan of World lh •..• 'li- 'i:' r ' ;;,<,,->-oe1.""~$+ .;c D~- co~-+""·-"'';o-'· 1 ..•• 1:;: '-'01" ~,~t","'l_;J' 1,{)-" -~- -"-"" _-...z:UL- -- -- ~ ~--""'--"'- .10. -, '::1 __ -_ -.ot.. •••. _~ , interest payinents forei.gn creditors: 6; bank deposits abroad of citizens of X: 9; credit extended -hy foreign suppliers of machinery to importers of X: 5; foreign fixms buys out a l.ocal firm: 3; profit ramittance abroad: 2; tourism abroad; 4; payment for use of foreign technology: 3; errors and omissions? .a) Makeup a balance of payments statement·. h) Is this country in surplus or deficit? Justify your defi.nition of surpl.us or deficit. ,# ~ .chtlr·· ... 1 ,\ ~ .. . ~ ., ,'1'" . I,.: . ...i~. ,;...~. '("'- () /{( .',.;" .~ ,~ a) "External and internal equilibria are often contradictory goals and the poli6y-~er is forced to choose between one or the other. 11 Towhat'~tent does this apply 1- to th:~~~':t~~~?"";:( t~~::(){"-:"!("!/ system of pegged exchange rates? In your answer makeuse of some f:,f/ 1" •.[ 1/ j !, f/ relevant analytical tools. JJ ,';. , 'O€'219f<-.O Y&-v ~C{ \,A C\.t.Qt;s.t. t. \~"'.t- r'{ r . '7 b) In a pegged exchange rate system, a country devalues its, "'\,\-V \."\("J currency. 1) Whatcircumstances would lead it to do that? 2) What ;'/ . factors would detexmdnethe initial success of this action? 3) What' factors coul.d undexmdnethis initial success? 4) Howcould this "pi / also be analyzed with the use of the IS-LM-BB (30 poi.nts)
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\ \. \ \ '\ \ . ' ... ,} ",.", .~~,+.'~, ,,;. .J. , ).~ .c ,., .(...( 4. From your study of the theory of balance of payments adjustments and of exchange rate theories/ how can you explain the following historical occurences? (In your answer to some part of the question you are strongly urged to apply relevant analytical tools, including diagrams where appropriate) . the negative impact on the United Kingdom of its return to the gold standard after World War I; the competitive devaluations of the 19308; the decline of the Bretton Woods system; the rise of the dollar in the first half of the 1980s despite a rising balance of trade deficit; the continued U.S. trade deficit with Japan despite the dramatic devalu4tion of,the-dollar vis-a-vis the Yen in the late 1980s and first half of the 1990s. Issues surrounding the continued US trade deficit with China? (24 points) 5. Suppose that in China it takes 2 unites of labor to make 1 VCR and 4 units of labor to make 1 TV set; and in the U.S. it takes 1 unit of labor to make 1 VCR and 1 unit of labor to make 1 TV set. Assume that each country has 200 units of labor .
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