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Unformatted text preview: Solutions 1. (a) In Barcelona in 1998, a particularly good caganer — a Catalan figurine which everyone should have — sold for 4,200 Spanish pesetas (ESP) . The spot exchange rate between the peseta and the Canadian dollar was 125 ESP/CAD. The CAD/USD spot rate was 1.40 CAD/USD. Statement : The ‘Law of One Price’ suggests that the same caganer should sell for 24 U.S. dollars, in Pittsburgh. True . The exchange rates imply that the ESP/USD = 125 × 1 . 4 = 175 ESP/USD. PPP says, therefore, that the caganer should sell for 4,200/175 = USD 24.00. (b) The growing importance of sovereign wealth funds is closely associated with the growing size of current account surpluses in the countries that own the funds. TRUE . Countries with current account surpluses are countries which are experiencing capital outflows. That is, they are countries that are ob- taining positive net foreign asset positions vis-a-vis the rest of the world. These days, many countries with big current account surpluses — e.g. , China, Norway, Saudi Arabia — are choosing to invest the capital asso- ciated with these surpluses in equities and the like, and are doing so via...
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- Spring '08
- Economics, United States dollar, USD, current account surpluses