Question

1. For a hypothetical economy, let Kl=capital inflow, NX=net exports and NS=nation al saving. If NS<l, then KI>0 and NX<o a. b. Kl>0 and NX>0 Kk0 and NX<0 c. d. Kl<0 and NX>0 The Australian dollar -Japanese Yen exchange rate is currently given by $A 1= Yen 100. Australian Government 1-year bond rates are 2% while Japanese Government 2. 1-year bond rates are 0.5%. Everything else being equal, Japanese currency invest ors should, Buy the $A, sell Japanese Government bonds and buy Japanese Yen Buy the $A, buy Japanese Government bonds and sell Japanese Yen Sell the $A, sell Australian Government bonds and buy Japanese Yen Sell the $A, buy Australian Government bonds and buy Japanese Yen a. b. c. d. 3. The Australian dollar - US dollar exchange rate is currently $A1= $US0.80. The price of a kilo of bananas is $A5 in Australia and $US3 in the United States. Which of the following statements is correct if purchasing power parity holds? a. The Australian dollar is undervalued relative to the US dollar. b. The Australian dollar is overvalued relative to the US dollar. The Australian dollar is correctly valued relative to the US dollar. c. d. It is not possible to tell whether the Australian dollar is over- or under-valued relative to the US dollar. If the Australian dollar- Japanese Yen exchange rate is given by $A 0.01 = 1 Yen and the US dollar -$A exchange rate is given by $US 1 $A 2. What is the Japanese Yen -US dollar exchange rate? a. 2 Yen $US 1 b. $US 200 Yen 1 Yen $US 200 SUS 0.005 1 Yen 4. c. d.

Answer 1

(1) For an Open economy, the GDP equation is given by

$\Rightarrow Y - C - G = I + NX$

The left hand side is called National Savings

$\Rightarrow NS = I + NX$

Now, we know that NS<I. This is only possible when NX>0. If we drop a positive term from the right hand side of the above equality, we have

NS <

$\therefore NX > 0$

Now, we know that

$\Rightarrow NX > 0$

$\Rightarrow Exports - Imports > 0$

$\Rightarrow Exports > Imports$

This means that we are exporting more goods than importing from other countries, implying a capital inflow.

K

Thus, the correct answer is Option (b) KI > 0 and NX > 0.

(3) $A 1 = $US 0.80

So, a kilo of bananas costing $A 5 in Australia, should have the following price in US if Purchasing Power Parity holds:

that is, this same kilo of bananas should cost $US 4 in the United States instead of $US 3.

This means that the American Dollar is overvalued relative to the Australian Dollar, or that the Australian Dollar is undervalued relative to the US Dollar. Thus, the correct answer is Option (a).

(4) $A 0.01 = 1 Yen

or, $A 1 = 100 Yen

And, $US 1 = $A 2

or, $A 1 = $US 0.5

Therefore, we have

$\Rightarrow \frac {Yen}{USD} = \frac{0.5}{100} = 0.005$

$\therefore 1 Yen = 0.005 USD$Option (d)