Global Economics

Problem 1. A client, JetPort Systems Inc., of your bank has recently completed a contract to upgrade the radar installation at Sao Paulo's international airport. The Brazilian government will wire a payment of 200M Reals (BRLs) to JetPort's bank in 90 days to settle the contract. The CFO of JetPort asks the bank for 90-day forward USD-BRL exchange rate quote as a hedge against unexpected depreciation in the BRL. The spot exchange rate is S(USD/BRL) = $.40/BRL. The 90-day USD and BRL interbank lending and borrowing interest rates are iUSD = 2% and iBRL= 5%, respectively.

What is a risk-free USD-BRL 90-day forward rate quote that the bank can offer JetPort's CFO? (in USDs per BRL). Show exactlyhow the bank would set uptheforward rate in the interbank loan market.

Problem 2. Consider the economy of Hicksonia.

a. The consumption function is given by

C = 300 + 0.6(Y - T).

The investment function is

I = 700 - 80r.

Government purchases and taxes are both 500. For this economy, graph the IS curve for r ranging from 0 to 8.

b. The money demand function in Hicksonia is

(M/P)^d = Y - 200r.

The money supply M is 3,000 and the price level P is 3. Graph the LM curve for r ranging from 0 to 8.

c. Find the equilibrium interest rate r and the equilibrium level of income Y.

d. Suppose that government purchases are increased from 500 to 700. How does the IS curve shift? What are the new equilibrium interest rate and level of income?

e. Suppose instead that the money supply is increased from 3,000 to 4,500. How does the LM curve shift? What are the new equilibrium interest rate and level of income?