Although your responses should be concise, ensure that you answer all portions of each question completely. The objective of this assignment is for you to synthesize the material presented in Units 1 through 5, and to consider each question rationally and logically.

1. Suppose that you observe the following exchange rates: $1.75/; $.0075/; and .005/. Is there cross-rate equality? If yes, why? If not, what would you expect to happen?
2. Your Canadian company processes raw sugar for sale in the United States, and the firm has just received a container of raw material from the UK. You have an invoice that asks you to pay 20,000 in 30 days. The current exchange rate is $1.75/.
   1. What would it cost you, in Canadian dollars, to pay the bill today?
   2. Ifyouthoughtthedollarwouldtradeat$2.0/in30days, what should you do?
   3. If you could lock into a forward rate today of $1.85/ for delivery in 30 days, what should you do?
3. Using the IS/LM/BP model and assuming perfect capital mobility, explain:

a. how an increase in foreign income affects domestic output. b. how a devaluation of the domestic currency affects domestic output.

1. The US has experienced large and growing current account deficits for more than 20 years, whereas Japan has experienced large and growing current account surpluses for roughly the same period. The US economy has grown at faster rates than Japan's over the past 10 years.
   1. Use the relationship between the current account and GDP to explain the difference in growth rates between the two economies.
   2. In trade negotiations with the Japanese over the large US trade deficit with Japan, the US administration has urged the Japanese government to undertake a more expansionary fiscal policy. Explain how this might affect the US trade deficit with Japan.

5. Using appropriate models or theories, explain the economic intuition (logic) behind the following events.

a. A decrease in money supply leads to a rise in short-run interest rate.

b. An increase in real income leads to a rise in short-run interest rate.