Question

1. (15 pts) (a) A country produces computers. If the pretrade domestic price for computers is $ 1500, and the world price for computers is $ 1200, will this country export or import computers?

(b) Say the US dollar appreciates against other currencies. What will happen to US exports?

(c) Say US interest rates decrease over Japanese interest rates. Will the US dollar appreciate or depreciate against the Japanese yen?

(d) Say the US economic growth rate increases over the Canadian economic growth rate. Will the US dollar appreciate or depreciate against the Canadian dollar?

(e) Country A has a Gini coefficient of 0.500, while country B has a Gini coefficient of 0.400. Which country has the more unequal income distribution?

Answer 1

a) If the domestic price for computers is greater than the world price of computers then it is better for the country to import since it will cheaper for the country that way.

b) Appreciation of a currency leads to imports becoming cheaper and exports becoming more expensive. Thus, US exports will decrease when the US dollar appreciates.

c) Increasing interest rate leads to inflation which ultimately results in depreciation of the currency. Hence, when the US interest rates decrease over Japanese interest rates, US dollar will appreciate since the interest rate is decreasing as compared to Japanese interest rates.

d) When the economic growth of a country increases there is appreciation of that country's currency. Thus, when US economic growth rate increases over the Canadian economic growth rate, US dollar will appreciate against the Canadian Dollar.

e) A Gini coefficient of 0.00 represents perfect equality and 1.00 represents perfect inequality. Therefore, country A has more unequal income distribution since its Gini coefficient is greater than that of country B's.