Questions and Answers of International Economics 5th

Several countries that have experienced political and economic stability adopt a fixed exchange rate regime to draw on the potential benefits, such as fiscal discipline, seigniorage, and expected
In the context of the trilemma, compare and contrast the dissolution of the gold standard during the 1920s and 1930s to the collapse of the Bretton Woods system during the 1960s and early 1970s. In
Home’s currency, the peso, currently trades at an exchange rate of 1 peso per dollar. Home has external assets of $320 billion, 100% of which are denominated in dollars. It has external liabilities
The International Monetary Fund (IMF) is often viewed as an international lender of last resort. When countries seek out loans from the IMF to alleviate banking and economic crises, the IMF often
Find the photo of the $20 gold coin on page 308 (700) in this chapter and refer to the specifications in the adjoining caption. Calculate the U.S. dollar price of 1 ounce of gold under the pre-1913
Consider how fixed exchange rate regimes differ in advanced economies versus emerging markets/developing countries.a. How do exchange rate crises differ across these groups?b. Among which groups are
Identify three countries with fixed exchange rates. Now use the Internet to search for and visit the websites of each of these countries’ central banks and download the latest balance sheet
Consider the central bank balance sheet for the country of Patria. Patria currently has 2,500 million lira in its money supply, 1,800 million of which is backed by domestic government bonds. Assume
Suppose a country has $2,000 million in money supply and $1,200 million in reserves.a. Illustrate the central bank balance sheet diagram. Calculate the backing ratio.b. Because of a recent banking
Using the central bank balance sheet diagrams in Figure, evaluate how each of the following shocks affects the country’s ability to defend a fixed exchange rate.a. The foreign interest rate
Compare and contrast the following scenarios in terms of their costs and benefits.a. The central bank uses sterilization bonds to obtain reserves.b. The central bank follows a strict currency board
Using a first-generation model, we’ve seen that fiscal policy plays a role in the central bank’s ability to maintain the exchange rate peg. Using a central bank balance sheet diagram, illustrate
In the text, we examined how government deficits affect the country’s ability to defend a peg using a first-generation model. Suppose an economy has $5,760 billion in money supply and $4,000
Consider the previous question. In this case, we assume investors are forward-looking and hear news that the government deficit will grow at 20% each year.a. How will investors respond to the
The textbook examines what happens when governments run persistent budget deficits in a first-generation model. Suppose that a country begins running large budget surpluses. In this case, will the
Consider a second-generation model of crises. Assume that the benefit of maintaining an exchange rate peg is equal to 4% (measured in output gap terms). Examine each of the following cases, assuming
During the East Asian currency crisis, some countries opted to float their currencies relative to the U.S. dollar, whereas others did not. Consider two countries: South Korea and Malaysia. South
Throughout the chapter, there are applications citing the dramatic accumulation of reserves among selected emerging markets and developing countries.a. What are the causes of this reserve
Describe how labor market mobility affects the cost–benefit OCA analysis for joining a currency union. How does labor market integration in the EU compare with that of the United States? Explain
Do some research on the Internet to construct an updated version of the map. You can find membership information on the websites of the European Union (europa.eu) and the European Central Bank
Consider three countries that are considering joining a currency union called the CU: Country A, Country B, and Country C. Country A and Country B have similar trade volumes with other countries in
In a symmetry-integration diagram, illustrate how each of the following scenarios affects the position of the OCA line and the likelihood that a given country (Country A) will join the currency
After German reunification and the disintegration of communist rule in Eastern Europe, most countries in that region sought to join the European Union (EU), including the Economic and Monetary Union
Consider the data presented in panels (a) and (b) from the text in the context of a symmetry-integration diagram. For this question, you may assume that the FIX and OCA lines are straight (linear)
Consider the claim that the OCA criteria are self-fulfilling. In what ways might this benefit a country that joins the currency union even if it doesn’t satisfy the OCA criteria before joining? In
Looking at the evidence, is the EU an optimum currency area? Reviewing a broad history of Europe, do you believe that the impetus for the formation of the EU and Eurozone was economic or political?
Suppose the country of Petria is seeking membership in a currency union, the CU, that uses a currency unit called the curo. The exchange rate is currently 2 Petrian dollars per curo. Petria’s
Compare and contrast the Fed and the European Central Bank in terms of their commitment to price stability and employment/output stability. Which central bank has more independence to pursue price
Countries seeking membership in the euro area need to maintain an exchange rate band equal to ±15% of the euro. For simplicity, assume the country sets its price equal to the price in the
Suppose you are a Swiss investor who has initial capital equal to 2,000 Swiss francs (Swf). You are looking to borrow an additional 18,000 in Swiss francs (at the Swiss interest rate). You plan to
Consider two countries, Plenus and Terra. The exchange rate is equal to 2 Plenus pesos (PP) = 1 Terra dollar (T$). Plenus and Terra each produce two goods: tradable computers and nontradable coaching
Consider the possible explanations for why there appear to be excess returns in forex markets. Evaluate the validity and plausibility of each based on the information given in the chapter.a. At high
Use the savings and investment two-country model to analyze each of the following scenarios. You should illustrate savings and investment for Home, Foreign, and the world. Assume the countries begin
Compare and contrast the experience of oil-exporting countries with that of emerging Asian markets in terms of their investment and savings behavior. In what ways are they different? Based on the
Using the repayment versus default diagrams illustrate how each of the following scenarios would affect the probability of default. Clearly label the repayment threshold, consumption with repayment,
Assume that a country currently has a 20% probability of default. The risk-free rate is 4%.a. Calculate this country’s lending rate.b. Illustrate the country’s situation on repayment probability
Suppose quotes for the dollar–euro exchange rate are as follows: in New York $1.05 per euro, and in Tokyo $1.15 per euro. Describe how investors use arbitrage to take advantage of the
Using the fundamental equations from the general monetary approach, describe how each of the following will affect the home and foreign price level, real money balances, and the exchange rate,
In this problem you will use the World Development Indicators (WDI) database from the World Bank to compute the comparative advantage of two countries in the major sectors of gross domestic product
How do regional trade agreements violate the most favored nation principle of the GATT/WTO?
Discovering Data In this problem you will use data from the Bureau of Economic Analysis (BEA) to investigate the dependence of the United States on foreign markets over time. Go to the BEA website at
Find the IMF’s World Economic Outlook Databases Use this interactive tool to obtain the latest data on current accounts in U.S. dollars for all countries (actual data or IMF estimates). Which
Use the table below to answer the following questions. Exchange Rate QuotationsYou and a friend Yi are considering a summer vacation to one of two locales, Mexico or Brazil. Mexico’s currency
Consider the United States and the countries it trades with the most (measured in trade volume): Canada, Mexico, China, and Japan. For simplicity, assume these are the only four countries with which
Discovering Data Not all pegs are created equal! In this question you will explore trends in exchange rates. Go to the St. Louis Federal Reserve’s Economic Data (FRED) website at
In June 2006, a Korean investor is considering investing in bank deposits in Korea and Japan. The annual interest rate on Korean deposits is 6.25%, versus 3.75% on deposits in Japan. Suppose that the
Consider a Dutch investor with 1,000 euros to place in a bank deposit in either the Netherlands or Great Britain. The (one-year) interest rate on bank deposits is 1% in Britain and 5% in the
Suppose that two countries, Brazil and Mexico, produce bananas. Brazil uses the real; Mexico uses the peso. In Mexico, bananas sell for 10 pesos per pound of bananas. The exchange rate is 0.5 real
Discovering Data: In recent years China has been routinely accused of currency manipulation. In this question you are asked to use the freely available finder.com Starbucks Index to investigate these
For each of the following goods and services, indicate whether you expect LOOP to hold. Explain briefly why you believe each good or service satisfies the assumptions necessary for LOOP to
PPP is the macroeconomic counterpart to LOOP. Suppose the assumptions needed for LOOP hold. Are there situations in which PPP may not hold when LOOP does? Explain briefly.
Using the fundamental equations from the simple monetary approach, describe how each of the following will affect the home and foreign price level, real money balances, and the exchange rate,
Table 3-1(14-1) in the text shows the percentage undervaluation or overvaluation in the Big Mac, based on exchange rates in July 2019. Go to the main data repository for the BigMac dataset
You are given the following information. The current dollar–pound exchange rate is $1.5 per pound. A U.S. basket that costs $100 would cost $120 in the United Kingdom. For the next year, the
This question follows from the analysis of Turkey and Europe in question 6. Assume that Turkey’s money growth rate is currently 15% and Turkey’s output growth rate is 9%. Europe’s money growth
This question considers long-run policies in Turkey relative to its largest trading partner: Europe. Assume that Turkey’s money growth rate is currently 15% and Turkey’s output growth is 9%.
This question considers long-run policies in Mexico relative to Canada. Assume that Mexico’s money growth rate is currently 4% and its inflation rate is 2%. Canada’s money growth rate is 6% with
Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), whereas South Korea had relatively robust output growth (6%). Suppose the Bank of Japan
Consider data on annual inflation rates across countries over time. How has the experience of advanced countries differed from that of emerging markets and developing countries? What might explain
Both the Federal Reserve in the United States and the European Central Bank monitor growth in the money supply over time, but they use nominal interest rates to implement policy. Provide an example
Consider a country that has experienced a hyperinflation. In general, countries with higher inflation rates tend to have less stable inflation rates, making the inflation rate difficult to forecast.
Suppose you are the policy advisor to the chairperson of the central bank in your country and you have been asked to analyze the effects of a change in monetary policy. Discuss how the monetary
Consider the fundamental equation of the asset approach to exchange rates for two countries, China and Thailand. The current spot exchange rate is 4 Thai baht per Chinese yuan, Ebath/yuan = 4.
Use the FX market diagram below to answer the following question. Consider the relationship between the Mexican peso and the Canadian dollar (C$). Let the exchange rate be defined as Mexican peso per
In the late 1990s, several East Asian economies had their currencies pegged to the U.S. dollar. Suppose there is an economic boom in the United States that leads to an increase in U.S. interest
In 1992, several European countries had their individual currencies pegged to the ECU (a precursor to the euro) in anticipation of forming a common currency area. In practice, this meant that
This exercise considers how the FX market will respond to changes in monetary policy. For these questions, define the exchange rate as British pounds (£) per euro, E£/€. Use the FX and money
Use the FX and money market diagrams to answer the following questions, which consider the relationship between the Swedish kronor (SK) and the Danish krone (DK). Let the exchange rate be defined as
What is exchange rate overshooting in the context of the asset or monetary approach used in this chapter? How does the prevalence of short-run exchange rate volatility depend on monetary policy and
This question compares the effects of temporary and permanent shocks to the money supply. In answering it, define the exchange rate as U.S. dollars per Chinese yuan, E$/¥a. Illustrate the
Use the FX and money market diagrams to answer the following questions. This exercise considers the relationship between the Japanese yen (¥) and U.S. dollar ($). Let the exchange rate be defined as
Under Article XIV of the GATT, regional trade agreements are permitted provided that countries within the arrangement do not change their tariffs against outside members. Because the tariffs on
In this question, you are asked to update the numbers for world trade that are shown in Table 1-1.Go to the World Trade Organization’s website at wto.org, and under “Documents, data and
Explain what each of the following terms means, and describe one example from this chapter in which each terms is used.a. Bilateral trade balanceb. Trade embargoc. Free-trade aread. Import
Professionals and highly educated workers are more likely to oppose limits on free trade, as compared with high-school–educated workers, because they have a better understanding of international
Name the top nine countries investing in the United States in 2009 using data on the historical-cost basis as compiled by the Bureau of Economic Analysis (http://bea.gov/international/di1fdibal.htm).
Have your class watch the TED Talk located at https://www.ted.com/talks/dilip_ratha_the_hidden_force_in_global_economics_sending_money_home?language=en: “The Hidden Force in Global Economics:
Consider a large country with export subsidies in place for agriculture. Suppose the country changes its policy and decides to cut its subsidies in half.a. Are there gains or losses to the large
Suppose the commerce department in a small importing country recently found that an exporter is dumping potatoes in the economy. Given the following scenarios, rank each from best to worst in terms
Suppose Boeing and Airbus are deciding whether to invest in R&D to improve the quality of their medium-capacity planes. Given the following payoff matrix in millions of dollars, what is the Nash
Refer to Problem 11. Examine India’s import of phenol from the United States. What other countries did India claim were dumping phenol? When did India initiate the antidumping duty petition? What
Tradia is a small export country. Suppose initially that the world price is $150. Due to successful lobbying activities, Tradia producers will now receive a subsidy of $25 per unit exported. Use the
With regard to “Fresh Tomatoes from Mexico: Suspension Agreement” (http://ia.ita.doc.gov/tomato/), the ITA states that “on December 4, 2002, the Department of Commerce and producers/exporters
Islandia is a small exporting country with supply and demand given by the following equations:Suppose the free-trade world price is $12 per unit.a. In the absence of any barriers to trade, what
What are export subsidies? Why do countries use them? Provide examples of such support programs.
In Figure 10-8 we showed the value of Chinese exports of rare earth minerals, along with their average price and quantity sold, in three categories of exports. The source for the data in Figure 10-8
Describe the impact of each of the following goals from the Hong Kong WTO meeting on (i) domestic prices and welfare of the country taking the action and (ii) world prices and welfare for the partner
Suppose the supply and demand for Continentia, a large country, is as follows:Assume that the free-trade world price is $5,000 per unit. Further assume that the Continentia government offers an
Refer to Problem 2. Suppose the governments of Europe seek to expand Airbus’s international market share by providing the European aircraft producer with a subsidy of $40 million for R&D.Data
Consider a small exporting country. Compare the cost to the government and the net effect on welfare between an export and production subsidy in the amount of s per unit. Home Price PW+S PW I D I a
Refer to Problems 2 and 3. Suppose the U.S. government decides to support Boeing with a matching subsidy.a. Redraw the payoff matrix and find the Nash equilibrium.b. How do
Suppose Home is a small country trading with a large exporter. The supply and demand curve for Home is illustrated by the following figure, where Pw denotes the free-trade world price. Assume that
It is more efficient for the government of a small country to impose an import tariff than a production subsidy to stimulate output because it does not have to pay the producers directly.
Recall that WTO guidelines allow an importing country to impose a countervailing duty to raise the price of the imported good in response to illegal government support such as an export subsidy on
Provide reasons for countries to use export subsidies. Does your answer depend on whether firms compete under perfect or imperfect competition?
How do trade creation and trade diversion increase and/or decrease economic welfare?
Discovering Data Listen to the podcast #116 called Fish Subsidies: What’s the Catch? at tradetalkspodcast.com, and answer the following questions:a. How long have negotiations about fish
Suppose Belarus, a small country, imposes a tariff in the amount of t per unit on imported coal. Assume that it imports coal from Ukraine rather than Poland because the former has a lower
Suppose the United States could import footwear from Thailand at the price of $20 per pair or from Mexico at $24 per pair. The domestic price of footwear in the United States is $35. Suppose prior to
What is the relationship among regional trade agreements, free-trade areas, and customs unions? What are the similarities and differences between the latter two? How do they impact world welfare?

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