International Economics

ECON476v7 Assignment 1A June 18, 2013
ECON 476v7
Assignment 1
Assignment 1 is worth 15% of your final grade and should be done after you have completed
Units 1 through 5. Read the requirements for each question and plan your responses
carefully. Answer all five questions.
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:
$2/£; $.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 $1.50/£.
a. What would it cost you, in Canadian dollars, to pay the bill today?
b. If you thought the dollar would trade at $2.0/£ in 30 days, what should you do?
c. If you could lock into a forward rate today of $1.75/£ 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.
4. 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.
a. Use the relationship between the current account and GDP to explain the
difference in growth rates between the two economies.
b. 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.
ECON476v7 Assignment 1A June 18, 2013
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.

ECON476v7 Assignment 2B June 18, 2013
ECON 476v7
Assignment 2
Assignment 2 is worth 15% of your final grade, and should be done after you have
completed Units 6 through 9. Read the requirements for each question and plan your
responses carefully. Answer all five questions.
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 6 through 9, and to consider each question rationally and logically.
1. Graphically demonstrate and explain whether or not the degree of capital mobility
will affect monetary policy under flexible exchange rates.
2. What happens to domestic income in the AS–AD model when the price of a critical,
imported, intermediate input suddenly rises? (Assume the demand for the input is
inelastic.)
3. Outline the development of the European Monetary System. Why did it develop?
4. Historically the gold standard was the anchor for nearly every traded currency.
Explain how the gold standard worked as nations traded domestically and
internationally at fixed exchange rates.
5. Some remedies and preventive measures have been put forth to slow or forestall
currency crises, such as capital controls and intermediate regimes (i.e., fixed or
floating exchange rates). Discuss these measures and comment on whether they
would be effective. Explain why or why not.