Extra

Question 1

finding equilibrium level of output

Answer 1

input all numbers, put ys together and solve

Question 2

does real exchange rate have units?

Answer 2

no b/c cancel out

Question 3

if PPP holds then

Answer 3

1=(ex10000)/500000 so e=50JPY/USD

Question 4

capital movements in Jp in 80s

Answer 4

• 1971: new ForEx w/ wide band fluctuations
• 1973: truly flexible ForEx
• post 1980: capital movements allowed unless explicitly prohibited

Question 5

JPY/USD rate under fixed system

Answer 5

360JPY/USD

Question 6

US policies effect on exchange rate

Answer 6

• fiscal deficits leads to increase in money demanded
• tight monetary policy leads to decrease in money supplied
• increases IR which creates dollar overvaluation b/c attracted foreign capital

Question 7

Plaza Agreement

Answer 7

• required deregulation of Jp markets
• JPY/USD rate sharply decreased after 1985

Question 8

historical ‘covered interest parity’

Answer 8

• held perfectly 1980-4
• JPY/USD rate sharply decreased after 1985

Question 9

current/capital-acount in Jp in 80s

Answer 9

• increase in Jp current-account surpluses accompnaied by increase in Japanese capital-account deficits 1981-7
• b/c increase in current-account surpluses there is a capital outflow leading to increased capital-account deficits

Question 10

classical model

Answer 10

• prices and wages flexible
• full employment achieved
• output at potential output
• Say’s law: demandside follows supplyside

Question 11

Keynesian model

Answer 11

• principle of effective demand: output determined by demandside
• output determines employment
• unemployment can exist

Question 12

opportunity cost of A in terms of B

Answer 12

A/B

Question 13

magnitudes of Jp current-account surplus and US current account deficits…monotonically increasing 1981-9

Answer 13

• not
• current account surpluses/GNP declining in Jp around 1986
• current account deficits/GNP declining in US around 1986/7

Question 14

J-curve mechanism if yen depreciates

Answer 14

• JPY/USD rate increases leads to trade deficits SR
• after time lag export volume increases, import volume decreases leading to surplus

Question 15

US vs. EC Jp’s trade

Answer 15

• US more important than EC in exports and imports
  
  • exports Jp to US = 34.1%
  • imports Jp from US = 22.5%
• both larger than EC

Question 16

intra-industry trade

Answer 16

• Jp’s IIT much lower than US
• 1987 IIT index (21 sectors) = 0.30 in Jp and 0.67 in US
• new theories suggest that increasing number of varieties of goods increases consumer utility
• however, if Japanese consumers don’t like foreign goods then Jp will import fewer foreign varieties

Question 17

relative wage of HS:LS workers increased in US and Mex in 80s and 90s

Answer 17

HO model predicts that relative wage of HS:LS workers in US will increase and in Mex. will decrease

Question 18

capital account balance

Answer 18

capital inflow - capital outflow

Question 19

purchasing power parity

Answer 19

unit of any given currency should be able to buy same quantity of goods in all countries

Question 20

current account balance

Answer 20

balance on goods + services + income + current transfer

Question 21

covered interest parity

Answer 21

(1+RJA)=(1+RUS)(f/s)

• s = spot JPY/USD exchange rate
• f = forward JPY/USD exchange rate

Question 22

classical theory of money

Answer 22

• classical dichotomy: money and goods side separated
• money supply cannot affect output
• money supply determines price level
  
  • policy increasing money supply just causes inflation

Question 23

Keynesian theory of money

Answer 23

money and goods side not separated

output determined by interaction b/w goods and money sides

IS = investment savings (demand)

LM = liquidity money (supply)

x-axis = output

y-axis = IR

Question 24

covered interest parity equality

Answer 24

(1+RJA)=(1+RUS)(f/s)

• LHS > RHS then demand for yen-denominated asset increases
• value of yen increases
• spot rate decreases
• so LHS=RHS again