Assignment

Question 1

Answer the following questions regarding Exchange Rates and International Capital Flows.

a) Suppose a country has an overall balance of trade so that exports of goods and services equal imports of goods and services. Does that imply that the country has balanced trade with each of its trading partners?

b) What does it mean to hedge a financial transaction?

c) What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?

Question 2

A British pound cost $1.56 in U.S. dollars in 1996, but $1.66 in U.S. dollars in 1998.

a) Was the pound weaker or stronger against the dollar?
b) Did the dollar appreciate or depreciate versus the pound?
c) Calculate the cost of a U.S. dollar in terms of British pounds in 1996 and 1998.

Question 3

Answer the following questions regarding The Impacts of Government Borrowing.

a) What is the difference between a progressive tax, a proportional tax, and a regressive tax?
b) What is the difference between a budget deficit, a balanced budget, and a budget surplus?
c) What is the difference between a budget deficit and the national debt?

Question 4

Answer the following questions about government borrowing-be sure to show your calculations.

a) A government starts off with a total debt of $3.5 billion. In year one, the government runs a deficit of $400 million. In year two, the government runs a deficit of $1 billion. In year three, the government runs a surplus of $200 million. What is the total debt of the government at the end of year three?

b) If a government runs a budget deficit of $10 billion dollars each year for ten years, then a surplus of $1 billion for five years, and then a balanced budget for another ten years, what is the government debt?

Question 5

Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below and justify your answer.

a) A recession.
b) A stock market collapse that hurts consumer and business confidence.
c) Extremely rapid growth of exports.
d) Rising inflation.
e) A rise in the natural rate of unemployment.
f) A rise in oil prices.