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international economics theory

Questions and Answers of International Economics Theory

Between 1984 and 1985, the money supply in the United States increased to $641.0 billion from $570.3 billion, while that of Brazil increased to 106.1 billion cruzados from 24.4 billion. Over the same
Imagine that the central bank of an economy with unemployment doubles its money supply. In the long run, full employment is restored and output returns to its full employ- ment level. On the
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 concept of
The velocity of money, V, is defined as the ratio of real GNP to real money holdings, V=YI(MIP) in this chapter's notation. Use equation (14-4) to derive an expression for velocity and explain how
How would you expect a fall in a country's population to alter its aggregate money demand function? Would it matter if the fall in population were due to a fall in the number of households or to a
Europe's single currency, the euro, was introduced in January 1999, replacing the cur- rencies of 11 European Union members, including France, Germany, Italy, and Spain (but not Britain; see Chapter
Suppose the one-year forward S/ exchange rate is $1.26 per euro and the spot. exchange rate is $1.2 per euro. What is the forward premium on euros (the forward dis- count on dollars)? What is the
Imagine that everyone in the world pays a tax of 7 percent on interest earnings and on any capital gains due to exchange rate changes. How would such a tax alter the analy- sis of the interest parity
The following report appeared in the New York Times on August 7, 1989 ("Dollar's Strength a Surprise," p. D1): But now the sentiment is that the economy is heading for a "soft landing," with the
We noted that we could have developed our diagrammatic analysis of foreign exchange market equilibrium from the perspective of Europe, with the euro/dollar exchange rate Ees (1/Es) on the vertical
Traders in asset markets suddenly learn that the interest rate on dollars will decline in the near future. Use the diagrammatic analysis of the chapter to determine the effect on the current
Calculate the dollar rates of return on the following assets:a. A painting whose price rises from $200,000 to $250,000 in a year.b. A bottle of a rare Burgundy, Domaine de la Romane-Conti 1978, whose
A U.S. dollar costs 7.5 Norwegian kroner, but the same dollar can be purchased for 1.25 Swiss francs. What is the Norwegian krone/Swiss franc exchange rate?
In Munich a bratwurst costs 5 euros; a hot dog costs $4 at Boston's Fenway Park. At an exchange rate of $1.50/per euro, what is the price of a bratwurst in terms of hot dogs? All else equal, how does
Using the data in the "Memoranda" to Table 12-3, calculate the U.S. 2006 net interna- tional investment position with direct investments valued at market prices.
We mentioned in the chapter that capital gains and losses on a country's net foreign assets are not included in the national income measure of the current account. How would economic statisticians
Return to the example in this chapter's final Case Study of how a 10-percent dollar depreciation affects U.S. net foreign wealth (p. 309). Show the size of the effect on foreigners' net foreign
If you go to the BEA Web site (http://www.bea.gov) and look at the Survey of Current Business for July 2007, table 1 on "U.S. International Transactions," you will find that in 2006, U.S. income
Suppose that the U.S. net foreign debt is 25 percent of U.S. GDP and that foreign assets and liabilities alike pay an interest rate of 5 percent per year. What would be the drain on U.S. GDP (as a
Is it possible for a country to have a current account deficit at the same time it has a surplus in its balance of payments? Explain your answer, using hypothetical figures for the current and
The nation of Pecunia had a current account deficit of $1 billion and a nonreserve financial account surplus of $500 million in 2008.a. What was the balance of payments of Pecunia in that year? What
A New Yorker travels to New Jersey to buy a $100 telephone answering machine. The New Jersey company that sells the machine then deposits the $100 check in its account at a New York bank. How would
Explain how each of the following transactions generates two entries-a credit and a debit in the American balance of payments accounts, and describe how each entry would be classified:a. An American
Equation (12-2) tells us that to reduce a current account deficit, a country must increase its private saving, reduce domestic investment, or cut its government budget deficit. Nowadays, some people
How does the French proposal for a carbon tax on imports relate to the issue of pollution havens?
"The fundamental problem with any attempt to limit climate change is that the coun- tries whose growth poses the greatest threat to the plant are also the countries that can least afford to pay the
France, in addition to its occasional stabs at strategic trade policy, pursues an active nationalist cultural policy, promoting French art, music, fashion, cuisine, and so on. This may be primarily a
What are advantages and disadvantages of instituting higher labor standards in devel- oping countries?
"The new strategic trade policy argument demonstrates the wisdom of policies like that of South Korea, which subsidizes its exports across the board. The subsidy gives each industry the strategic
What are the key assumptions that allow strategic trade policy to work effectively in the Brander-Spencer example of Airbus and Boeing?
Tables 11-1 and 11-2 presented a situation in which European governments were able to use a subsidy to achieve a strategic advantage, while Tables 11-3 and 11-4 presented a situation in which it
Suppose the U.S. government were able to determine which industries will grow most rapidly over the next 20 years. Why doesn't this automatically mean that the nation should have a policy of
Suppose that the demand for labor in manufactured goods is equal to 100 Ly and that the demand for labor in agriculture is equal to 80-L. There are 100 workers in the economy.a. What is the
A country currently imports automobiles at $8,000 each. Its government believes domestic producers could manufacture autos for only $6,000 given time but that there would be an initial shakedown
Which countries appear to have most benefited from international trade during the last few decades? What policies do these countries seem to have in common? Does their experience lend support to the
Recently, the United States has taken action to restrict imports of certain Chinese goods, such as toys containing lead and seafood that doesn't meet health standards, in order to protect U.S.
If governments make trade policies based on national economic welfare, is the problem of trade warfare still represented by a Prisoner's dilemma game as in Figure 9-3? What is the equilibrium
"There is no point in the United States complaining about trade policies in Japan and Europe. Each country has a right to do whatever is in its own best interest. Instead of complaining about foreign
Suppose that upon entering the European Union, it is discovered that the cost of auto- mobile production in Poland is 14,000 while it is 20,000 in Germany. Suppose that the EU, which has a customs
Suppose that demand and supply are exactly as described in problem 3 but there is no marginal social benefit to production. However, for political reasons the government counts a dollar's worth of
a. Calculate the total effect on welfare of a tariff of 5 per unit levied on imports.b. Calculate the total effect of a production subsidy of 5 per unit.c. Why does the production subsidy produce a
A small country can import a good at a world price of 10 per unit. The domestic supply curve of the good is The demand curve is S = 50+ 5P. D = 400-10P. In addition, each unit of production yields a
Which of the following are potentially valid arguments for tariffs or export subsidies, and which are not? Explain your answers.a. "The more oil the United States imports, the higher the price of oil
"For a small country like the Philippines, a move to free trade would have huge advan- tages. It would let consumers and producers make their choices based on the real costs of goods, not artificial
1.2. Calculate the change in government purchases of goods and services necessary to close the recessionary or inflationary gaps in the following cases. Assume that the short-run aggregate supply
1.1. An economy has a marginal propensity to consume of 0.6, real GDP equals $500 billion, and the government collects 20% of GDP in taxes. If government purchases increase by$10 billion, show the
1.16. Unlike households, governments are often able to sustain large debts. For example, in September 2007, the U.S. government’s total debt reached $9 trillion, approximately 64% of GDP. At the
1.15. How did or would the following affect the current public debt and implicit liabilities of the U.S. government?a. In 2003, Congress passed and President Bush signed the Medicare Modernization
1.14. In which of the following cases does the size of the government’s debt and the size of the budget deficit indicate potential problems for the economy?a. The government’s debt is relatively
1.13. Your study partner argues that the distinction between the government’s budget deficit and debt is similar to the distinction between consumer savings and wealth. He also argues that if you
1.12. In 2008, the policy makers of the economy of Eastlandia projected the debt–GDP ratio and the ratio of the budget deficit to GDP for the economy for the next 10 years under different scenarios
1.11. You are an economic adviser to a candidate for national office.She asks you for a summary of the economic consequences of a balanced-budget rule for the federal government and for your
1.10. Figure 29-10 shows the actual budget deficit and the cyclically adjusted budget deficit as a percentage of GDP in the United States since 1970. Assuming that potential output was unchanged, use
1.9. The government’s budget surplus in Macroland has risen consistently over the past five years. Two government policy makers disagree as to why this has happened. One argues that a rising budget
1.8. The accompanying table shows how consumers’ marginal propensities to consume in a particular economy are related to their level of incomea. Suppose the government engages in increased
1.7. Most macroeconomists believe it is a good thing that taxes act as automatic stabilizers and lower the size of the multiplier.However, a smaller multiplier means that the change in government
1.5. Show why a $10 billion reduction in government purchases of goods and services will have a larger effect on real GDP than a$10 billion reduction in government transfers by completing the
1.4. During an interview on May 16, 2008, the German Finance Minister Peer Steinbrueck said, “We have to watch out that in Europe and beyond, nothing like a combination of downward economic
1.2. The accompanying diagram shows the current macroeconomic situation for the economy of Brittania; real GDP is Y1, and the aggregate price level is P1. You have been hired as an economic
1.1. Explain how each of the following events would affect the public debt or implicit liabilities of the U.S. government, other things equal. Would the public debt or implicit liabilities be greater
1.2. Explain why states required by their constitutions to balance their budgets are likely to experience more severe economic fluctuations than states not held to that requirement.
1.1. Why is the cyclically adjusted budget balance a better measure of the long-run sustainability of government policies than the actual budget balance?
1.3. The country of Boldovia has no unemployment insurance benefits and a tax system using only lump-sum taxes. The neighboring country of Moldovia has generous unemployment benefits and a tax system
1.1. Explain why a $500 million increase in government purchases of goods and services will generate a larger rise in real GDP than a $500 million increase in government transfers.
1.1. In each of the following cases, determine whether the policy is an expansionary or contractionary fiscal policy.a. Several military bases around the country, which together employ tens of
1.Why implicit liabilities of the government are also a cause for concern
1.Why a large public debt may be a cause for concern
1.Why fiscal policy has a multiplier effect and how this effect is influenced by automatic stabilizers
1.Which policies constitute an expansionary fiscal policy and which constitute a contractionary fiscal policy
1.What fiscal policy is and why it is an important tool in managing economic fluctuations
1.16. The late 1990s in the United States were characterized by substantial economic growth with low inflation; that is, real GDP increased with little, if any, increase in the aggregate price level.
1.15. In the accompanying diagram, the economy is in long-run macroeconomic equilibrium at point E1 when an oil shock shifts the short-run aggregate supply curve to SRAS2. Based on the diagram,
1.14. The economy is in short-run macroeconomic equilibrium at point E1 in the accompanying diagram. Based on the diagram, answer the following questions.a. Is the economy facing an inflationary or a
1.13. Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process by which each of the following government policies will move the economy from one
1.12. Using aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, explain the process by which each of the following economic events will move the economy from one
1.7. Suppose that the economy is currently at potential output.Also suppose that you are an economic policy maker and that a college economics student asks you to rank, if possible, your most
1.4. In each of the following cases, in the short run, determine whether the events cause a shift of a curve or a movement along a curve. Determine which curve is involved and the direction of the
1.2. Your study partner is confused by the upward-sloping shortrun aggregate supply curve and the vertical long-run aggregate supply curve. How would you explain this?
1.2. A rise in productivity increases potential output, but some worry that demand for the additional output will be insufficient even in the long run. How would you respond?
1.2. Suppose the economy is initially at potential output and the quantity of aggregate output supplied increases. What information would you need to determine whether this was due to a movement
1.1. Determine the effect on short-run aggregate supply of each of the following events. Explain whether it represents a movement along the SRAS curve or a shift of the SRAS curve.a. A rise in the
1.1. Determine the effect on aggregate demand of each of the following events. Explain whether it represents a movement along the aggregate demand curve (up or down) or a shift of the curve (leftward
1.Why Is the Aggregate Demand Curve Downward Sloping?
1.How monetary policy and fiscal policy can stabilize the economy
1.How the AD–AS model is used to analyze economic fluctuations
1.Why the aggregate supply curve is different in the short run compared to the long run
1.How the aggregate supply curve illustrates the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy
1.How the aggregate demand curve illustrates the relationship between the aggregate price level and the quantity of aggregate output demanded in the economy
1.2. Complete the following table by calculating the value of the multiplier and identifying the change in Y* due to the change in autonomous spending. How does the value of the multiplier change
1.1. In an economy without government purchases, transfers, or taxes, and without imports or exports, aggregate autonomous consumer spending is $500 billion, planned investment spending is $250
1.3. Economists observed the only five residents of a very small economy and estimated each one’s consumer spending at various levels of current disposable income. The accompanying table shows each
1.1. Due to an increase in consumer wealth, there is a $40 billion autonomous increase in consumer spending in the economies of Westlandia and Eastlandia. Assuming that the aggregate price level is
1.3. Consumer spending was sluggish in late 2007, and economists worried that an inventory overhang—a high level of unplanned inventory investment throughout the economy—would make it difficult
1.2. Historically, investment spending has experienced more extreme upward and downward swings than consumer spending. Why do you think this is so? (Hint: Consider the marginal propensity to consume
1.1. For each event, explain whether planned investment spending or unplanned inventory investment will change and in what direction.a. An unexpected increase in consumer spendingb. A sharp rise in
1.2. Suppose that problems in the capital markets make consumers unable either to borrow or to put money aside for future use. What implication does this have for the effects of expected future
1.1. Suppose the economy consists of three people: Angelina, Felicia, and Marina. The table shows how their consumer spending varies as their current disposable income rises by $10,000.a. Derive each
1.3. As a percentage of GDP, savings accounts for a larger share of the economy in the country of Scania compared to the country of Amerigo. Which country is likely to have the larger multiplier?
1.2. What is the multiplier if the marginal propensity to consume is 0.5? What is it if MPC is 0.8?
1.1. Explain why a decline in investment spending caused by a change in business expectations leads to a fall in consumer spending.

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