international economics Chapter 21: problem 1 CHAPTER PROBLEMS 1. You have acquired an option to buy Swiss francs at a strike price of $.70 per Swiss franc. (At the time you bought the contract, the spot exchange rate was only $.50 per Swiss franc.) In e

  

international economics 

Chapter 21: problem 1

CHAPTER PROBLEMS

1. You have acquired an option to buy Swiss francs at a strike price of $.70 per Swiss

franc. (At the time you bought the contract, the spot exchange rate was only $.50 per

Swiss franc.) In each of the following three cases, would you choose to exercise the

option? Answer either "definitely yes," "definitely no," or "maybe yes; maybe no, to

wait to see if the spot exchange value of the Swiss franc goes higher."

a. The current spot exchange rate is $.60 per Swiss franc.

b. The current spot exchange rate is $.80 per Swiss franc, and the contract is about

to expire.

c. The current spot exchange rate is $.80 per Swiss franc, and the contract still has

two months to run.

d. Would the option be more or less valuable if the Swiss franc is thought to be

highly volatile this year?

chapter 22 

problem 1 

1. A country that maintains a fixed exchange rate suffers from unemployment and a

balance-of-payments deficit. What combination of G and i is appropriate? (See

Appendix.)

Chapter 23  fiscal and monetary policy under modern financial market conditions

problem 1 

1. A country imports wine, exports steel, and has a floating exchange rate. If it raises gov-

ernment spending on health care, increasing the budget deficit, how are the following

four domestic interest groups affected: hospital workers, steel mills, wineries, and con-

struction workers? How does your answer depend on the degree of international capi-

tal mobility?

Chapter 24  crisis in emerging market

problem 2 

2. Now assume that devaluation has a contractionary effect on domestic demand because

of a balance sheet effect from dollar debts:

aAaA

Y = A(i E) + TB < 0, a—E--, < O.

? Draw the relationship between i and E that gives

Y= Y

internal balance(output equal to potential). Assume that the stimulus to net

exports is small in the short run because the elasticities are small. What is the

intuition?

b. Again, if there is an exogenous adverse balance of payments shock, can we be

confident in what direction i and E should be moved, so as to preserve external

balance without causing a recession? Explain.