Questions and Answers of Finance Applications And Theory

You are thinking of investing in Nikki T’s, Inc. You have only the following information on the firm at year-end 2021: net income is $250,000, total debt is $2.5 million, and debt ratio is 55
Use the following information to complete the balance sheet below. Sales are $8.8 million, capital intensity ratio is 2.10 times, debt ratio is 55 percent, and fixed asset turnover ratio is 1.2 times.
The top part of Ramakrishnan, Inc,’s 2021 and 2020 balance sheets is listed below (in millions of dollars). Calculate Ramakrishnan, Inc.’s current ratio, quick ratio, and cash ratio for 2021 and
Use the following information to find dividends paid to common stockholders during 2021.
13. Suppose the production function for aggregate output in the United States is the same as in India, Y = AKaL1-a, where A is a total productivity factor, K is the capital stock, and L is the supply
12. In some emerging market economies, not only are debt obligations to foreigners denominated in dollars, but so are many of the economies’ internal debts, that is, debts of one domestic resident
11. Some critics of the adoption of fixed exchange rates by emerging market economies argue that these exchange rates create a kind of moral hazard. Do you agree? (Hint: Might borrowers behave
3. In the early 1980s, Brazil’s government, through an average inflation rate of 147 percent per year, got only 1.0 percent of output as seigniorage, while Sierra Leone’s government got 2.4
■■ Discuss proposed measures to enhance poorer countries’ gains from participation in the world capital market.
■■ Recount the recent history of developing-country financial crises.
■■ Explain the position of developing countries in the world capital market and the problem of default by developing borrowers.
■■ Summarize the major economic features of developing countries.
■■ Describe the persistently unequal world distribution of income and the evidence on its causes.
15. In the spring of 2013 Cyprus followed Greece, Ireland, and Portugal in agreeing to an emergency loan from the troika of the EU, ECB, and IMF. The cause was big losses in the Cypriot banking
12. In the United States’ currency union, we seem never to worry if a state has a big current account deficit. Have you ever seen such data in the newspaper? Can you even find the data in any U.S.
10. Before Brexit Britain was firmly within the EU, but it didn’t adopt the euro, and fierce debate raged over the issue.a. Find macro data on the British economy’s performance since 1998
9. Why would the failure to create a unified EU labor market be particularly harmful to the prospects for a smoothly functioning EMU, if at the same time capital is completely free to move among EU
7. During the speculative pressure on the EMS exchange rate mechanism (ERM)shortly before Britain allowed the pound to float in September 1992, The Economist, a London weekly news magazine, opined as
4. Do your answers to problems 2 and 3 require an assumption that interest rates and expected exchange rate changes are linked by interest parity? Why or why not?
3. Continue with problem 2. Imagine that in Italy, the interest rate on five-year government bonds was 11 percent per annum and that in Germany, the rate on five-year government bonds was 8 percent
■■ Recount how the 19 countries using the euro have fared so far in their currency union, and the steps they are taking in response to their prolonged economic crisis.
■■ Articulate the main lessons of the theory of optimum currency areas.
■■ Detail the structure of the ECB, the European System of Central Banks, and the European Union’s arrangements for coordinating member states’ economic policies.
■■ Describe how the European Union, through the Maastricht Treaty of 1991, placed itself on the road to having a single currency, the euro, issued and managed by a European Central Bank (ECB).
■■ Discuss why Europeans have long sought to stabilize their mutual exchange rates while floating against the U.S. dollar.
14. If you return to Figure 20-4, you will notice that London Eurodollar interest rates tend to exceed U.S. certificate of deposit rates after the global financial crisis, but not before. Why do you
13. How would your answer to problem 12 change if the bank’s creditors expect the government sometimes to step in with a bailout that prevents losses on the bank’s debt liabilities?
11. In interpreting ratios such as those in Table 20-1, one must be cautious about drawing the conclusion that diversification is rising as rapidly as the reported numbers rise. Suppose a Brazilian
10. Several multilateral or regional development banks have been created since WW II.The last born is the Asian Infrastructure Investment Bank (AIIB) created effectively in January 2016. It counts 50
5. In their article (and the book) “This Time is Different,” Carmen M. Reinhart and Kenneth S. Rogoff asserted the there is a view that both countries and creditors do learn from their mistakes
1. Which portfolio is better diversified—one that contains stock in a petrol company and a car company or one that contains stock in a petrol company and a pharmaceutical company?
■■ Evaluate the performance of the international capital market in linking the economies of the industrial countries.
■■ Understand the factors leading to the worldwide financial crisis that started in 2007.
■■ Describe some different methods that have been used to measure the degree of international financial integration.
■■ Analyze problems in the regulation and supervision of international banks and nonbank financial institutions.
■■ Explain factors leading to the explosive recent growth of international financial markets.
■■ Understand the economic function of international portfolio diversification.
13. The Case Study starting on page 620 discussed the big global imbalances of the 2000s and suggested that one can analyze factors determining world real interest rates in terms of the balance
8. In the box on New Zealand, we derived an equation showing how the IIP changes over time: IIPt+1 = (1 + r)IIPt + NXt. Show that if g = (GDPt+1 - GDPt)>GDPt is the growth rate of nominal output
6. Suppose the central bank of a small country with a fixed exchange rate is faced by a rise in the world interest rate, R*. What is the effect on its foreign reserve holdings?On its money supply?
■■ Discuss how the world economy has performed in recent years and what lessons the post-1973 experience teaches about the need for international policy coordination.
■■ Summarize how the monetary and fiscal policies of a large country such as the United States are transmitted abroad under floating exchange rates.
■■ Explain how the Bretton Woods system collapsed in 1973 and why many economists at the time favored an international financial system such as the current one based on floating dollar exchange
■■ Discuss how the post–World War II Bretton Woods system of globally fixed exchange rates was designed to combine exchange rate stability with limited autonomy of national macroeconomic
■■ Describe the structure of the international gold standard that linked countries’exchange rates and policies prior to World War I and the role of the Great Depression of the 1930s in ending
■■ Understand the monetary trilemma that policy makers in open economies inevitably face and how alternative international monetary systems address the trilemma in different ways.
■■ Explain how the goals of internal and external balance motivate economic policy makers in open economies.
21. Recall our discussion of the Swiss franc’s currency floor in the box on pp. 552–554.Also, recall the discussion of the liquidity trap in Chapter 17. Because Switzerland has been in a
18. In the Case Study on international reserves (pp. 563–567), we asserted that except in the case of a reserve currency system, an attempt by all central banks simultaneously to raise their
14. Use a diagram like Figure 18-7 to explain how a central bank can alter the domestic interest rate, while holding the exchange rate fixed, under imperfect asset substitutability.
4. Explain why a devaluation improves the current account in this chapter’s model.(Hint: Consider the XX curve developed in Chapter 17.)
2. Do the exercises in problem 1 for an increase in government spending.
■■ Describe how alternative multilateral systems for pegging exchange rates work.
■■ Discuss causes and effects of balance of payments crises.
■■ Explain how monetary, fiscal, and sterilized intervention policies affect the economy under a fixed exchange rate.
■■ Describe and analyze the relationship among the central bank’s foreign exchange reserves, its purchases and sales in the foreign exchange market, and the money supply.
■■ Understand how a central bank must manage monetary policy so as to fix its currency’s value in the foreign exchange market.
20. We can express a linear approximation to the interest parity condition (accurate for small exchange rate changes) as: R = R* + (Ee - E)>Ee. Adding this to the model of problems 14 and 19, solve
19. Return to problem 14 and notice that, to complete the model described there, we must add the interest parity conditions. Observe also that if Yf is the fullemployment output level, then the
16. The chapter’s discussion of “Inflation Bias and Other Problems of Policy Formulation”suggests (p. 481, paragraph 4) that there may not really be any such thing as a permanent fiscal
15. See if you can retrace the steps in the five-step argument on page 485 to show that a permanent fiscal expansion cannot cause output to fall.
12. Suppose interest parity does not hold exactly, but the true relationship is R = R* + (Ee - E)>E + r, where r is a term measuring the differential riskiness of domestic versus foreign deposits.
7. You observe that a country’s currency depreciates while its current account worsens. What data might you look at to decide if you are witnessing a J-curve effect? What other macroeconomic change
3. In 2015, the Canadian government intended to adopt a balance budget act requiring the government to maintain a balanced budget at all times. Hence, if the government wishes to change government
■■ Explain the relationship among macroeconomic policies, the current account balance, and the exchange rate.
■■ Describe and interpret the long-run effects of permanent macroeconomic policy changes.
■■ Understand how monetary and fiscal policies affect the exchange rate and national output in the short run.
■■ See how an open economy’s short-run equilibrium can be analyzed as the intersection of an asset market equilibrium schedule (AA) and an output market equilibrium schedule (DD).
■■ Explain the role of the real exchange rate in determining the aggregate demand for a country’s output.
18. Suppose residents of the United States consume relatively more of U.S. export goods than residents of foreign countries. In other words, U.S. export goods have a higher weight in the U.S. CPI
14. Discuss the following statement: “When a change in a country’s nominal interest rate is caused by a rise in the expected real interest rate, the domestic currency appreciates. When the change
13. Suppose the expected real interest rate in Hong Kong is 5 percent per year while that in Singapore it is 2 percent per year. What do you expect to happen to the real HK$/SNG exchange rate over
12. Suppose the expected real interest rate in the United States is 9 percent per year while that in Europe is 3 percent per year. What do you expect to happen to the real dollar/euro exchange rate
11. Explain how the nominal euro/RMB exchange rate would be affected (all else equal) by permanent changes in the expected rate of real appreciation of the RMB against the euro.
9. Imagine two identical countries have restricted imports to identical levels, but one has done so using tariffs while the other has done so using quotas. After these policies are in place, both
7. Continuing with problem 7, discuss how the transfer would affect the long-run nominal exchange rate between the two currencies.
5. The following chart shows the numbers on the average nominal rate (NER) and real exchange rate (REER) of the Japanese Yen against several foreign currencies(such average index numbers are called
■■ Explain the relationship between international real interest rate differences and expected changes in real exchange rates.
■■ Understand factors that affect real exchange rates and relative currency prices in the long run.
■■ Discuss the concept of the real exchange rate.
■■ Describe how monetary factors such as ongoing price level inflation affect exchange rates in the long run.
■■ Explain the purchasing power parity theory of exchange rates and the theory’s relationship to international goods-market integration.
11. How might a zero interest rate complicate the task of monetary policy? (Hint: At a zero rate of interest, there is no advantage in switching from money to bonds.)
10. Figure 14-2 shows that Japan’s short-term interest rates have had periods during which they are near or equal to zero. Is the fact that the yen interest rates shown never drop below zero a
9. In our discussion of short-run exchange rate overshooting, we assumed real output was given. Assume instead that an increase in the money supply raises real output in the short run (an assumption
7. Between 1980 and 2005, Ghana experienced some periods of high inflation and periods of less high inflation. Some key macroeconomic data on the evolution of economic and financial variables are
5. Does our discussion of money’s usefulness as a medium of exchange and unit of account suggest reasons why some currencies become vehicle currencies for foreign exchange transactions? (The
3. The velocity of money, V, is defined as the ratio of real GNP to real money holdings, V = Y>(M>P) in this chapter’s notation. Use equation (15-4) to derive an expression for velocity and explain
1. Suppose there is a reduction in aggregate real money demand, that is, a negative shift in the aggregate real money demand function. Trace the short- and long-run effects on the exchange rate,
■■ Outline the relationship between the short-run and the long-run effects of monetary policy, and explain the concept of short-run exchange rate overshooting.
■■ Explain how price levels and exchange rates respond to monetary factors in the long run.
■■ Distinguish between the economy’s long-run position and the short run, in which money prices and wages are sticky.
■■ Show how monetary policy and interest rates feed into the foreign exchange market.
■■ Describe and discuss the national money markets in which interest rates are determined.
18. In the beginning of 2015 the interest rate of some currencies are the following:Australia 2.25 Canada 0.75 China 5.60 EU- euro 0.05 Japan 0.10 Mexico 5.75 New Zealand 3.5 Russia 15 South Africa
16. Europe’s single currency, the euro, was introduced in January 1999, replacing the currencies of 11 European Union members, including France, Germany, Italy, and Spain (but not Britain; see
■■ Find the effects of interest rates and expectation shifts on exchange rates.
■■ Apply the interest parity condition to find equilibrium exchange rates.
■■ Use exchange rates to calculate and compare returns on assets denominated in different currencies.
■■ Describe the structure and functions of the foreign exchange market.

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