EC 201 Wednesday Section, Assignment #8

Metropolitan State University

ECON 201-4 (Wednesday) Fall 2004

Assignment #9, due 12/1

The first four questions are required. The other questions are for your own amusement, thought and practice.

1. Here’s a table like the one at the beginning of the lecture notes on international monetary stuff:

x / USD / GBP
USD / 1 / 1.92
GBP / 1

A. What is the interpretation of 1.92?

B. What number goes in the missing cell?

C. What is the interpretation of the number in the missing cell?

2. How will each of the following events affect the value of the Bulgarian lev? You should know that Bulgaria produces excellent wine and cheeses.

A. Large numbers of wine drinkers around the world discover Bulgarian wines and begin to demand them in huge quantities.

B. Stabilization of property rights combine with the tremendous popularity of Bulgarian wine to produce excellent investment opportunities in Bulgaria.

C. Expansion of the Bulgarian money supply leads to lower real interest rates and raises fears of inflation in Bulgaria.

3. Who wouldn’t like to go out and have two or three Big Macs for lunch?

A. Explain how you would use arbitrage to make money off of the price difference between Big Macs in the U.S. and Big Macs in Sweden.

B. Explain how large numbers of people doing this would lead to purchasing power parity.

C. Explain why you can’t do this with Big Macs.

4. What does a country’s government or central bank have to do to maintain the value of its currency at the fixed level if:

A. The market value of the currency is below the fixed value?

B. The market value of the currency is above the fixed value?

Happy Fun Questions

1. Why the heck would a country working with a fixed exchange rate allow its currency to be devalued?

2. How has the U.S. maintained a huge current accounts deficit for so long? How does the balance of payments balance under these circumstances?

3. What do you get and what do you give up when you use another country’s currency as your country’s currency?

4. Don’t we need fixed exchange rates to facilitate international trade?