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Econ 305 Intermediate Macroeconomics: Assignment 6 Answers

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ECON 305 Intermediate Macroeconomics: Assignment 6 Answers
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QUESTION 1 – Openness in Goods and Financial Markets
a) Explain the three types of trade that countries conduct.
b) Define the nominal exchange rate of a country. Define the real exchange rate of a
country. Why is the real exchange rate the appropriate price for thinking about decisions
by consumers and firms about whether to buy domestic or foreign goods and services?
c) Explain how the nominal exchange rate, and domestic and foreign price inflation affect
the real exchange rate.
d) If the domestic country’s real exchange rate (currency) depreciates, how would you
expect this to affect the domestic country’s trade balance in goods and services? Explain.
e) What do we mean by purchasing power parity (a theory of real and nominal exchange
rates)? If the domestic country’s price level declines, what does purchasing power parity
predict would tend to happen to the nominal exchange rate and foreign price level?
Explain.
f) What is the source of large differences between the GDP and GNP of oil exporting
countries? In answering the question, explain carefully the difference between gross
domestic product and gross national product.
g) Suppose the uncovered interest parity condition holds, and that the domestic interest
rate is lower than the foreign interest rate. What does this imply about the current versus
future expected currency value for the domestic country?
h) Assume that the one-year interest rate in the United States is 4% and that the one-year
interest rate in Canada is 3%. According to uncovered interest rate parity, what does this
imply about the current versus the future expected value of the US...

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