ECON 103 PROBLEM SET # 1

(2
nd
semester AY 2012-13)
1. The following items are the recorded international transactions of a developing country called
Sordos with the rest of the world in 2012:
Foreign aid received by Sordos from abroad $ billion
!alue of imports of grain $20 billion
"rofits of #S multinationals operating in Sordos $ billion
$ending of #S ban%s to the government of Sordos $20 billion
!alue of e&ports of bananas $10 billion
"urchases of Florida real estate by wealthy Sordosians $1 billion
'nternational reserves sold by the (entral )an% of Sordos
to influence the e&change rate $* billion
a. +ow much is the trade balance for Sordos in 2012,
b. -hat was the value of the current account balance,
c. -as the reported capita account for Sordos in 2012 in deficit or surplus,
d. +ow much was the official reserve transactions balance,
2. .iven perfect capital mobility and aggregate demand e&pressed as
0 0
/ 0 Y A T bi q = + :
a. Solve for the e&change rate e as a function of income
b. 1etermine the e2uilibrium e&change rate as a function of e&ogenous variables.
c. -hat is the effect on the e2uilibrium level of income and the level of the e&change
rate of an e&ogenous increase in the world interest rate3 i4, 'llustrate graphically and
algebraically.
*. (onsider a case of imperfect capital mobility and fle&ible e&change rates. #sing the 'S5$6
curves3 illustrate the impact of a change in government spending on income. -hat happens to
the impact when the degree of capital mobility increases, -hen it decreases,
7. (onsider a country with no capital mobility and fle&ible e&change rates.
a. Solve for the e&change rate that clears the trade balance as a function of the level of
income3 Y. /8ssume that the trade balance is in the form

T = T
0
+ q mYwhere is
a positive constant and
q= /eP4 P0
0.
b. Solve for the level of income as a function of all e&ogenous variables. 'n what way
does the multiplier differ from all other open economy multipliers computed before,
c. Suppose there is an e&ogenous increase in the demand for the country9s e&ports.
1etermine algebraically the effect on the e&change rate and on income. .raphically
illustrate using the 'S5$6 diagram.
d. Suppose that government spending on domestic goods increases. 1etermine
algebraically the effect on output and the e&change rate.
e. (ompare the results form part c and d. -hy do they differ 2ualitatively even if both
disturbances initially increase desired spending on domestic goods,
. 8ssume perfect capital mobility and fle&ible e&change rates. Suppose real money demand is
L = 0.20Y *3 000i 3 with i*:0.103 money supply e2ual to *00 billion and average
domestic price level e2ual to 1. -hat would be the effect on the nominal e&change rate of an
une&pected contraction of the money supply by 20 billion if the country9s income is fi&ed in
the short run and investors9 e&pectations are rational, -hat would be the change in the
country9s interest rate, -ould investors anticipate further changes in the value of the
currency,
;. 'f the economy is in long run e2uilibrium with <ero capital mobility3 determine the e2uilibrium
price of domestic goods as a function of the e&change rate3 foreign prices3 and full
employment income. 1etermine also the economy9s e2uilibrium interest rates.
=. (onsider an economy under perfect capital mobility and fi&ed e&change rates. $et
A = A
0
+ a Y b i = 7>0 + 0.=Y ?00i
T = T
0
m Y +q = *0 0.2Y + 2q
i 4 = 0.10
q =10
a. -hat is the e2uilibrium level of output in the economy, 's the balance of trade in
surplus or deficit, / pts0
b. Suppose there is an e&ogenous increase in the foreign demand for domestic e&ports
such that autonomous trade balance increases by =. -hat is the effect on the
e2uilibrium level of output in the economy3 the balance of trade, / pts0
c. Suppose there is a reduction in government spending of ;0. -hat will be the effect
on the e2uilibrium level of output3 the value of e&ports3 imports3 the trade balance, /
pts0