Order 2527986: short answer questions and graphs

Question – 1. 5 points

Suppose that US economy in recession, explain the effect of the recession in the nominal exchange rate (Canadian perspective): draw a graph of the foreign exchange market, demand & supply of US dollars, with exchange rate on the vertical axis (as discussed in the lecture). Does Canadian dollar appreciate or depreciate?

Question – 3. 6 points

Answer the Following questions: (qs. a + b + c = 3 points. Qs. d = 3points)

a) If foreign countries increase their interest rates then what will happen to the capital inflow in Canada?

b) If US citizens sell Canadian bonds then what will be the impact on the Canadian currency

c) Suppose it costs C$1.35 to buy one US$, and the price level or index in the US is 120. The price level or index in Canada is 115. What is the real exchange rate from Canada’s perspective?

d) Consider a country with a fixed exchange rate that has a current account surplus of $20 billion, but a financial account deficit of $18 billion. Is its balance of payments in deficit or surplus? Why? Is the central bank buying or selling foreign currency?

Question - 4. 4 points

Assume, the initial exchange rate is $1.20Cdn for $1.00US. After 10 years, the United States price level has risen from 100 to 200, and the Canadian price level has risen from 100 to 175.

i) What was the inflation rate in each country?

ii) What nominal exchange rate would preserve the initial real exchange rate?

iii) Which country’s currency depreciated?

Question - 5. 5points

Suppose you can invest $1,000 Canadian for a year. Canadian one-year interest rates are 4 percent. In the United States one-year rates are 5 percent. The higher United States rates look attractive. If you keep your funds in Canadian dollars (invest in Canada), how much money will you have at the end of the year? If the exchange rate is $1.03Cdn/$1US then can you do better by buying a United States asset? What would be your decision if exchange rate becomes $1.009Cdn/$1US, would you buy US asset?

Part II

Question – 1. 5 points

The domestic demand for bicycles is given by Q = 32/0.3 – P/0.3 The foreign supply is given by P = 16 and domestic supply by Q = P/0.4 - 12/0.4

(a) Illustrate the market equilibrium on a diagram, and illustrate the amounts supplied by domestic and foreign suppliers in equilibrium.

(b) If the government now imposes a tariff of $3 per unit on the foreign good, illustrate the impact geometrically.

(c) In the diagram, illustrate the area representing tariff revenue.

(d) Compute the price and quantity in equilibrium with free trade, and again in the presence of the tariff.

e) Show the dead-weight loss

(f) Explain costs and benefits of a tariff.

Question – 2. 2points

Illustrate graphically the impact of subsidy given to the local producers. As discussed in class, you need to show and explain with the domestic demand, domestic supply, domestic supply with subsidy, import, change in local supply, etc.

Question - 3. 3points

The domestic demand for office printers is given by P = 50−0.2Q. The supply of domestic producers is given by P = 22+0.1Q, and international supply by P = 30.

(a) Illustrate this market geometrically.

(b) If the government gives a production subsidy of $2 per unit to domestic suppliers in order to increase their competitiveness, illustrate the impact of this on the domestic supply curve.

(c) Compute the cost to the government of this scheme.

Question – 4. 2points

Given the following productions of two countries

	Canada	US
Vegetable	5 units	8 units
Fish	35 units	40 units

Let, the Terms of Trade: 1 V : 6 F (The terms of trade define the rate at which the two goods will trade post-specialization. Let us suppose that a bargaining process leads to agreement that one unit of Vegetable will trade for six units of Fish. Such a trading rate, one that lies between the opportunity costs of each economy, benefits both economies)

(a) Draw PPFs of both countries

(b) Draw Consumption Possibility Frontier of two countries

(c) Show the gain from trade

Question – 5. 3points

According to the following table, which country is relatively more labour abundant? Explain your answer. Which country is relatively capital abundant?

	Canada	US
Capital	40 machines	10 machines
Labour	200 Workers	60 workers

Suppose that the United States and Canada have the factor endowments in the preceding table. Suppose further that the production requirements for a unit of steel are two machines and eight workers, and the requirement for a unit of bread is none machine and eight workers,

(a) Which good, bread or steel, is relatively capital-intensive? Labour intensive? Explain.

(b) Which country would export bred?