Question

Question 4

a)

The demand for cameras in a certain country is given by D=8000-30P, where P is the price of a camera. Supply by domestic camera producers is S=4000+

10P. If this economy opens to trade while the world price of a camera is$50, what will be the quantity of cameras that this country imports or exports?

A. 2000 exports

B. 3000 exports

C. 2000 imports

D. 3000imports

b)

Suppose Australia has an annual 6%inflation rate,while the annual growth rate of the nominal exchange rate,expressed in euros per Australian dollar,is 4%. If purchasing power parity holds,what is the annual inflation rate in the Eurozone?

A. 10%

B .6%

C. 0%

D. 4%

c)

The demand for Australian dollars in the foreign exchange market equals 14000－3000e and the supply of Australian dollars in the foreign exchange market equals 2000+2000e,where e is the nominal exchange rate expressed in euros per Australian dollar.If the Australian dollar is fixed at 3 euros per Australian dollar,then to maintain this fixed rate,what action is required by the Reserve Bank of Australia in the foreign exchange market?

A. sell 3000 dollars and purchase euros

B .purchase 3000 dollars and sell euros

C. purchase 9000 dollars and sell euros

D. sell 9000 dollars and purchase euros

d)

Which of the following is a debit item in the Australian current account?

A. An Australian consulting company receives payment from an overseas firm

B. An Australian company pays for consulting services from an overseas firm

C. The tuition paid by overseas students at an Australian university

D. The sale of wool to ltaly

Answer 1

Answer 4:

a)

D=8000-30P & S=4000+10P.

In this economy equilibrium Price is where demand and supply are equal

8000-30P=4000+10P or 8000-4000=10P+30P or 4000=40P or 100=P.

If import is allowed at $50 per camera then demand will be D=8000-30*50=6500.

Domestic supply at P=$50 will be S=4000+10P or 4000+10*50=4500.

Difference between demand and supply=6500-4500=2000.

Quantity Deficient in supply will be imported. Therefore, 2000 cameras will be imported. So, correct option is option C.

b)

Inflation rate in Australia is 6%.

Growth rate in nominal exchange rate is 4%, i.e Euro/Aus Dollar is increased by 4%. It shows that the currency of Euro depreciated. This could only be because of increase in inflation in Euro country is 4 % higher than the inflation in Australia. Therefore inflation in Eurozone is 6%+4%=10%.

Correct optio is option A.

c)

Demand for Australian dollar=14000-3000e and Supply of Australian dollar=2000+2000e.

At e=3 Demand =14000-3000*3=5000 and supply= 2000+2000*3=8000.

Supply is greater than demand by 3000(8000-5000). So, to maintain the exchange rate, Reserve bank of Australia should purchase 3000 dollars and sell euros.

Correct option is option B.

d)

In the current account of a country all the payments to foreign country are debit items. So, payment made by an Australian company for consulting services from an overseas firm is debit item in current account.

Correct option is option B.