IBP International Economics

Transcription

1 IBP International Economics Final Exam Oct. 23, 2014 There are three large questions and 21 sub-questions which are labeled with letters. There are six pages. You have four hours to write the exam. This is a closed book exam. You are advised to show your work and explain your answers, as incorrect answers with some correct thinking will receive partial credit. 1. Ricardian model: Two countries, Home (H) and Foreign (G). Two goods, food (F) and clothing (C). Home s unit labor requirements are a C = 2 and a F = 1. Foreign s unit labor requirements are a C = 4 and a F = 8. Home has 100 units of labor, and Foreign has 400 units of labor. (a) If Home only produces clothing, how much clothing will it produce? (b) Which country has a comparative advantage in clothing production? (c) Draw and label in detail the Production Possibilities Frontier (PPF) of Home. (d) What is the autarchy wage at Home, taking autarchy prices of food PF a and clothing P C a as given? (e) Draw the relative supply curve for the world. Put P F P C on the Y-axis. (f) Suppose the relative demand curve intersects the relative supply curve (only) at P F P C = 3 2. What is the pattern of production and trade? That is, what is produced in each country and what is exported from each country? (g) Plot the consumption possibilities frontier for Home on the same plot with the PPF from part (c). Why will trade make Home at least as well off as it was in autarchy? 2. Trade Policy: (a) If Home is an importer of wheat, and decides to levy a tariff on wheat, does the price of wheat in Foreign tend to go up or down? (b) By how much will the price wheat differ in Home and Foreign, after Home imposes the tariff? 1

2 (c) Wheat demand in Home is: D = 80 20P Wheat supply at Home is: S = 20P What is the autarchy price of wheat at Home? (d) Suppose the Import Demand and Export Supply curve intersect at P = 1. What is the quantity of wheat traded under free trade? (e) Suppose Home imposes a specific tariff of 1 per unit of wheat imported. Suppose after imposing the tariff the price of wheat at Home is 32. What is the wheat price in Foreign? (f) Suppose that Home imposes the tariff from part (e). Use the following plot of Home wheat demand and wheat supply to clearly mark in detail the five following regions: i. ii. iii. iv. v. Gain to producer surplus Loss to consumer surplus Gain to government surplus Terms of trade loss (i.e. net loss) Efficiency gains (i.e. net gain) You do not need to numerically calculate the area of these regions. (g) Indicate whether the following surpluses tend to grow or shrink after Foreign imposes an export subsidy on wheat: i. Producer surplus in Foreign 2

3 ii. Consumers surplus in Foreign iii. Government surplus in Foreign iv. Producer surplus in Home v. Consumer surplus in Home (h) Has our discussion of tariffs in this problem been partial or general equilibrium? (i) If all surpluses are valued equally, all else equal, is a small tariff welfare improving? 3. Exchange rates and Money Supply (a) Indicate whether the following transactions are counted in Denmark s GNP: i. A Dane buys a used Christiana Bike from another Dane ii. Coming back from a vacation in China, a Dane sells some Chinese currency to her bank for DKK iii. A Dane buys an expensive meal of algae, fungus, and grass at Noma iv. A Dane who owns stock of the American corporation Apple Inc is paid a dividend v. Copenhagen Business School pays a newly arrived American faculty member for teaching International Economics. Please explain your answer to this one (b) Comparing Euro bonds to DKK bonds i. If E DKK/EURO is the number of DKK I can buy for one Euro, how can I write the number of Euro I can buy for one DKK? ii. Suppose the return for Euro bonds is R EURO. Recall that return can be written: R = money received next period money invested this period money invested this period If I invest 1 DKK in Euro bonds, how many Euros will I have next period? iii. Suppose we know that the exchange rate next period will be EDKK/EURO e. If I invest 1 DKK in the Euro bond, how many DKK will I have next period? iv. Using the formula for return from (ii) and your answer to (iii), what is the return of Euro bonds in DKK? v. We can approximate (iv) with the expression: R EURO + Ee DKK/EURO E DKK/EURO E DKK/EURO If the second term is positive, does that mean we expect the DKK appreciate or depreciate against the Euro? 3

4 vi. Let R DKK be the return of DKK bonds. If: R DKK R EURO Ee DKK/EURO E DKK/EURO E DKK/EURO < 0 then should I invest in DKK bonds or in Euro bonds? (c) Recall that M S P = l(r, Y ) in equilibrium (Money supply equals money demand). l(r, Y ) is the real demand for liquid assets, and it is a function of the interest rate of illiquid assets and GNP. Is l increasing or decreasing in the interest rate of illiquid assets R? 4

5 (d) Using the chart below, show all short-run effects of a one-time increase in the supply of dollars (i.e. assume that P US, Y US, and R e are fixed, but allow R $, E $/e, and E$/e e to adjust). 5

6 (e) Using the chart below, show all long-run effects of a one-time increase in the supply of dollars. 6