Econ 161 - International Macroeconomics

Instructor: Jesus Sandoval-Hernandez

University of California Merced

Fall 2013

Sample Midterm Exam 1

Name________________________________________________
Instructions: Answer all questions in a blue book. To receive any credit you MUST show your
work. To optimize the use of your time, pay attention to the points assigned to each question.
1. Assume your company has a contract to purchase 100,000 computers from a Korean company.
The payment is due on receipt of the shipment and must be delivered in Korea on December 31,
2010. In July 2010, when you are arranging the contract, the computers are priced at 500,000
won each. The spot rate in July 2010 is $1 exchanging for 1250 won.
a. Calculate the U.S. dollar price (in July 2010) of 1 unit of Korean currency.
b. What is the total price of the computers in dollars?
c. What is the total price of the computers in won?
d. What would you advise your firm to do to avoid a loss on the deal if the Korean won costs
10% more compared to the U.S. dollar when payment is due in December?
2. Consider an investor seeking to invest in United Kingdom. Assume that uncovered interest
parity holds. Explain how each of the following would affect the value of the British pound and
U. S. dollar.
a. What would happen to the spot rate E$ / if British interest rate rose?
iH = iF +

E He / F E H / F
EH / F

b. If U.S. interest rise, what must happened to the expected dollar return on British deposits?
c. What could explain a sudden depreciation in the dollar if U.S. and British rates do not change?
3.The price of an apple in the U.S. is $1 and the exchange rate is E$ / euro = 1.25 . If international in
apples is frictionless (no transportation costs, etc), then what must the price of an apple be in
Germany?
4. Using the fundamental equations from the general monetary approach, describe how each of
the following will affect the home and foreign price level, real money balances, and the
exchange rate, E H / F . Also, state whether the home currency appreciates or depreciates for each.

a. A decrease in the foreign money supply

b. A decrease in home real income
c. A decrease in the foreign nominal interest rate
3. This question considers long-run policies in Turkey relative to its largest trading partner:
Europe.
Assume Turkeys money growth rate is currently 15% and Turkeys output growth is 9%.
Europes money growth rate is 4% and its output growth is 3%. Also assume that the world real
interest rate is 1.75%. For the following questions, use the conditions associated with the general
monetary model. Treat Turkey as the home country and define the exchange rate as Turkish lira
per euro, EL/.
a. Calculate the inflation rates in Turkey and Europe.
b. Calculate the expected rate of depreciation in the Turkish lira relative to the euro.
c. Suppose the central bank of Turkey decreases the money growth rate from 15% to 11%. If
nothing in Europe changes, what is the new inflation rate in Turkey?
4. (40 points). Use the FX and money market diagrams to answer the following questions. The
diagrams must be accompanied with explanations. This question considers the relationship
between Swedish kronor (SK) and Danish krone (DK). Let the exchange rate be defined as
Swedish kronor per Danish krone, ESK/DK. On all graphs, label the initial equilibrium point A.
Suppose that there is an economic boom in Sweden, leading to an increase in real money demand
in that country.
a. Assume this change in real money demand is temporary. Using the FX and money market
diagrams, illustrate how this change affects the money and FX markets. Label your short-run
equilibrium point B and your long-run equilibrium point C.
b Assume this change in real money demand is permanent. Using a new diagram, illustrate how
this change affects the money and FX markets. Label your short-run equilibrium point B and
your long-run equilibrium point C.
c. Compare the two cases above in terms of exchange-rate overshooting. Define exchange rate
overshooting and state whether each type of shock (temporary and permanent) leads to
exchange-rate overshooting, referring to your previous diagrams.
Useful Formulas:
E He / F E H / F
iH = iF +
EH / F

q H / F = (E H / F PF ) / PH
EH / F =

PH
PF

EH / F

(M H / M F )
( LH YH / LF YF

H ,t = H ,t g H ,t
E He / F E H / F
= H F
EH / F

iH iF = He Fe
iH = rHe + He

r * = rHe = rFe