Archives: Solution Manual

Using the data given in the question: FA = − ($1,000 + $75) FA = −$1,075 million Because FA < 0, foreign purchases of Rijkdom’s assets < Rijkdomians’ purchases of foreign assets. Rijkdom is a net importer of assets. It […]

those available from the exchange of assets: This simplifies to the BOP identity: CA + KA + FA = 0 How the Balance of Payments Accounts Work: A Microeconomic View The balance of payments must balance. The sum of the […]

16 National and International Accounts: Income, Wealth, and the Balance of Payments Notes to Instructor Chapter Summary This chapter begins by discussing an integrated view of national income and product (NIP) accounts with balance of payments (BOP) accounts. The chapter […]

1979. (The M1 growth rate was annualized, then smoothed, using a 3-month moving average.) Between June and August of 1978, the M1 growth rate fell from almost 12% to about 6%. The Fed funds rate rose from 7.60% to 8.04%, […]

Short–Run Policy Analysis We begin by studying temporary shocks. These shocks do not affect long-run prices or expected exchange rates. A Temporary Shock to the Home Money Supply Figure 15-8 illustrates the effects of a temporary increase in the home […]

15 Exchange Rates II: The Asset Approach in the Short Run Notes to Instructor Chapter Summary This chapter combines the asset approach, based on the uncovered interest parity (UIP) condition from Chapter 13, with the monetary approach from Chapter 14 […]

4 (15) Exchange Rates II: The Asset Approach in the Short Run Discovering Data In this question we will be testing an assumption of our model of exchange rate determination. In particular, you will be showing that the PPP assumption […]

If the government adopts a fixed exchange rate regime, or sets the percentage change in the exchange rate equal to a constant, this will keep the inflation rate constant. The drawback of this approach is that the home country’s inflation […]

Money Growth, Inflation, and Depreciation When developing the theory of PPP, we examined both absolute and relative PPP. Because economists are often more interested in studying the behavior of inflation rather than the level of prices, it is convenient to […]

14 Exchange Rates I: The Monetary Approach in the Long Run Notes to Instructor Chapter Summary This chapter develops the long-run model of exchange rate determination that will be used in later chapters. Beginning with the theory of purchasing power […]

3 (14) Exchange Rates I: The Monetary Approach in the Long Run 1. Discovering Data: In recent years China has been routinely accused of currency manipulation. Use The Economist’s Big Mac Index to investigate these claims. Go to http://www.economist.com/content/big-mac–index to […]

Country (currency) Currency Symbol (1) Per $ (2) Per £ (3) Per € (4) Per $ (5) Per £ (6) Per € Canada (dollar) C$ 1.063 1.59 1.302 1.161 1.913 1.629 Denmark DKr 6.081 9.098 7.449 5.309 8.743 7.447 Euro […]

2 (13) Introduction to Exchange Rates and the Foreign Exchange Market 1. Discovering Data Not all pegs are created equal! In this question you will explore trends in exchange rates. Go to the St. Louis Federal Reserve’s Economic Data (FRED) […]

5 Arbitrage and Interest Rates Recall that most foreign currency operations involve bank deposits. A bank deposit is an asset that generates interest for the depositor. The decision of where to maintain deposits is largely a matter of convenience for […]

13 Introduction to Exchange Rates and the Foreign Exchange Market Notes to the Instructor Chapter Summary This chapter introduces students to exchange rates, to the foreign exchange (forex) market, to the way foreign currency is exchanged in private and government […]

1 (12) The Global Macroeconomy 1. Discovering Data In this problem you will use data from the Bureau of Economic Analysis (BEA) to investigate the dependence of the United States on foreign markets over time. Go to the BEA website […]

12 The Global Macroeconomy Notes to the Instructor Chapter Summary This chapter provides students with a broad overview of international macroeconomics. The chapter uses several key concepts to introduce the subject to students without formal Comments Instructors may want to […]

22 Topics in International Macroeconomics Notes to Instructor Chapter Summary This chapter covers extensions to the models presented in earlier chapters. There are four topics covered: ■ purchasing power parity (PPP), especially the issue of why price levels are higher […]

37 In fact, when China subsidizes panels and exports them to the United States and Europe at below cost, the social gains are even greater. Yet, both countries have instituted retaliatory tariffs in response to China’s “dumping.” The reasons are […]

21 Suppose a tariff in the amount of t dollars is applied on all importers before NAFTA. Then the United States imports Q1 units of auto parts at a price of PAsia + t given by point A, where the […]

11 International Agreements: Trade, Labor, and the Environment Notes to Instructor Chapter Summary This chapter shows that without international agreements, countries have a strong incentive to choose policies that could result in the prisoner’s dilemma. Namely, a country would impose […]

Teaching Tip 3: The break-even condition for lenders (the equation following Figure 22- 10) implies a value of the lending rate. Solving for rL, we get rL = (1 + r − p)/p = [(1 + r)/p] − 1 The […]

loan demand. An increase in volatility of output leads to an increase in the lending rate and an ambiguous effect on the amount borrowed. APPLICATION The Costs of Default This application considers empirical measures of the costs of default from […]

hold. Changes in the nominal exchange rate reflect: ■ Inflation differentials 2 Exchange Rates in the Short Run: Deviations from Uncovered Interest Parity The UIP condition relies on arbitrage to ensure that the expected return on foreign deposits equals the […]

11 (22) Topics in International Macroeconomics 1. (PPP) Richland and Poorland each have two industries: traded TVs and nontraded house maintenance. The world price of TVs is R$100 (R$ = Richland dollar). Assume for now that the exchange rate is […]

A government-applied tariff results in a price of − , as shown in Figure 10-6, causing the export supply curve in panel (b) to shift upward by the amount of the tariff from X to X + , resulting in […]

expectation that these costs will be repaid at the government rate. Indirect subsidies to the military divisions are limited to 4% of the company’s annual sales and prohibit production subsidies and, in addition, limit the government from offering buyers low […]

b. Suppose that based on the OCA, Country A and Country B join the CU but Country C does not. Illustrate the OCA line on your diagram based on this information. Answer: See the previous diagram. Country A and Country […]

The ECB’s key characteristics are as follows: ■ Instruments and goals: ● Instrument: Interbank lending rate ● Goals: * Primary: “Maintain price stability” * Secondary: “Support the general economic policies in the Community ■ Forbidden activities: ● The ECB may […]

21 The Euro Notes to the Instructor Chapter Summary This chapter examines the theory of optimum currency areas, focusing on the Eurozone or Euro area. The chapter provides a historical background on Europe to better Comments This chapter provides a […]

10 (21) The Euro 1. Discovering Data Do some research on the Internet to construct an updated version of the map in Figure 21-1. You can find membership information on the websites of the European Union (europa.eu) and the European […]

an exporter is dumping potatoes in the economy. Given the following scenarios, rank each from best to worst in terms of the importing country’s welfare. Explain. i. Free trade ii, Foreign dumping iii. Foreign dumping with an antidumping duty iv. […]

effective price of computing power fell rapidly in the United States between 1982 and 1988. Brazil, however, did not achieve the same low prices as the United States during Consumer and Producer Surplus The effect of the tariff protection on […]

Numerical Example of Dumping To understand why it is profitable for the Foreign firm to export the good at below- average cost, we use the following hypothetical information pertaining to its costs and demand. Fixed costs = $100 Marginal costs […]

9 Import Tariffs and Quotas Under Imperfect Competition Notes to Instructor Chapter Summary This chapter is much like the previous Chapter 8, except now we will drop the assumption of perfectly competitive markets and examine once again the impact of […]

9 Import Tariffs and Quotas Under Imperfect Competition 1. Figures A, B, and C are taken from a paper by Chad Bown: “The Pattern of Anti dumping and Other Types of Contingent Protection” (World Bank, PREM Notes No. 144, October […]

Growth in Exports from China Figure 8-12 compares the changes in clothing and textiles exports with the United States following the elimination of the MFA. Panel (a) shows that in 2005, China’s textile and apparel exports to the United States […]

States and occurs in addition to the deadweight loss of area +. Note that the deadweight loss for the steel tariff was $186 million per year, substantially less than the loss from the discriminatory tariff. This informs us that discriminatory […]

8 Import Tariffs and Quotas Under Perfect Competition Notes to Instructor Chapter Summary This chapter examines the impact of import tariffs and quotas on the welfare of the importing country, exporting country, and world. The welfare implications are different, depending […]

8 Import Tariffs and Quotas Under Perfect Competition 1. At the opening of this chapter, we referred to the events of May 1995, when the United States considered putting tariffs on imports of luxury cars from Japan. Specifically, on May […]

36 4 Conclusion In this chapter, we focused on a different type of trade than in previous chapters. Here, we looked at the intermediate products used in production— not trade in final goods and services. The Ricardian and Heckscher‒Ohlin models […]

jobs—the mid–level wage jobs. This means that low– and mid-level wage categories were impacted with lower employment in the 1980s, while in the 1990s, the mid–level wage workers were more heavily impacted. This reflects a trend toward greater loss for […]

7 Offshoring of Goods and Services Notes to Instructor Chapter Summary Up to this point, we have focused on the trade of final goods and services—consumer goods. But, a significant amount of trade involves intermediate goods and services or inputs […]

7 Offshoring of Goods and Services 1. What type of occupation would you like to pursue after graduation? To see what is available, to the Bureau of Labor Statistics website at: https://www.bls.gov/ooh/. a. Find four occupations that you think fit […]

1 6 Increasing Returns to Scale and Imperfect Competition Notes to Instructor Chapter Summary In the Ricardian and modified specific-factors model as well as in the Heckscher–Ohlin model, we assumed perfectly competitive markets, where there are many firms, each producing […]

6 Increasing Returns to Scale and Monopolistic Competition 1. a. Of two products, rice and paintings, which product do you expect to have a higher index of intra-industry trade? Why? b. Access the U.S. TradeStates Express website at http://tse.export.gov/tse/tsehome.aspx. Click […]

rose over 20% relative to the level in 1994. In both sectors, real wages increased by 2003 to the levels reached in 1994. As an alternative to examining real wages, we could instead study the real monthly income, which would […]

5 Movement of Labor and Capital Between Countries 1. Under Headlines: Brussels Resumes Policy Push to Share out Refugees across EU, there is a map showing persons seeking asylum in the European Union, as of May 2015. In this question, […]

World Gains from Migration The sum of triangles ABC and A*BC representing Home and Foreign gains, respectively, gives the larger triangle A*AB, which denotes the increase in the world gross domestic product (GDP) due to immigration. For example, when the […]

21 point B in Figure 5-8, where the unchanged relative price of computers is just tangent to Rybczynski theorem: In the Heckscher‒Ohlin model with two goods and two factors, an increase in the amount of a factor found in an […]