Macroeconomics

Quizz Group 1
Exercise 1 : 6 points 2 Points by right answer Exercise 2 : 4 points 2 Points : True 2 Points : Right explanation
Average = 5,58/10

Quizz Group 2
Exercise 1 : 6 points 2 Points by right answer

Exercise 2 : 4 points 2 Points : True 2 Points : Right explanation

Average = 7,73/10

Quizz (2) - Solutions

Part 1 - Complete the following table:
Year 1 Nominal GDP 100 120 150 Real GDP 100 100 125 GDP deflator 100 120 120

2 3

Quizz (GR1) - Solutions

Part 1 - Complete the following table:
Year 1 2 Nominal GDP 80 80 Real GDP 100 67 GDP deflator 80 120

150

125

120

Group Project (GR1) -TEAMS

Team A : Dutreil, Mugnier, Pelletier, Ponsford, Pozzi Rocco (5)

Team B : Cluzel, Karpowicz, Rajagopalan, Tekaya, Van Ophem (5)

Team C : Faubert, Gregoire, Qvale, Wojcik (4) Team D : Bonthoux, Joly, Karollus, Salinier, Tournet (5)

Group Project (GR2) -TEAMS

Team A : Delaporte, Champetier, Lahiri, Michel, Zhou (5) Team B : Blancarte, Datta, Dietrich, Nothaft, Siebken (5) Team C : Amarger, Berman, Brun, Cho, Georges (5) Team D : Kang, Samantar, Von Dundas, Pelino (4) Team E : Fayet, Patry, Vermesch (3)

Last Week

Percentage Change :

The % change of a product of two variables is approximately the sum of the % changes in each of the variables.

Math proof : d(PY)=YdP + PdY d(PY)/PY=dP/P + dY/Y

Investor = someone who invests its money (bonds/saving account). Not a firm/company which borrows money.

National income accounts identity. Y = C + I + G + NX.

Subtract C and G from both sides and obtain Y C - G = I + NX.

Lets call this S, national saving.

So, now we have S = I + NX >>>>> S I = NX.

This form of the national income accounts identity shows that an economys net exports must always equal the difference between its saving and its investment.
S I = NX Trade Balance
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Net Capital Outflow

Net Capital Outflow = Trade Balance

S I = NX
If S - I and NX are positive, we have a trade surplus. We would be net lenders in world financial markets, and we are exporting more goods than we are importing.

If S - I and NX are negative, we have a trade deficit. We would be net borrowers in world financial markets, and we are importing more goods than we are exporting.
If S - I and NX are exactly zero, we have balanced trade since the value of imports equals the value of exports.
10

Nominal Exchange Rate

Real Exchange Rate

Ratio of Price Levels

e=e

(P*/P)

The Nominal Exchange Rate is the relative price of the currency of 2 countries. The Real Exchange Rate is the relative price of the goods of 2 countries. P is the price level of the domestic country and P* is the price level of the foreign country. If the real exchange rate is high, foreign goods are relatively cheap, and domestic goods are relatively expensive. If the real exchange rate is low, foreign goods are relatively expensive, and domestic goods are relatively cheap.
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Real exchange rate, e

The relationship between the real exchange rate and S-I net exports is negative: the lower the real exchange rate, the less expensive are domestic goods relative to foreign goods, and thus the greater are our net exports. The real exchange rate is determined by the intersection of the vertical line representing S-I (Net Capital Outflow) and downward-sloping net exports schedule.
NX(e)

Net Exports, NX

Here the quantity of dollars supplied for net foreign investment equals the quantity of dollars by foreigners buying our net exports.
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Simple Questions
1.

If net exports are positive, which of the following is false?

A. Domestic output exceeds domestic spending. B. Domestic saving exceeds domestic investment. C. Net capital outflow is positive. D. There is a balance of trade deficit.

2.

In a small open economy, the interest rate is determined by the A. equilibrium of saving and investment. B. interest rate in the rest of the world. C. excess of government spending over government revenue. D. value of net capital outflow.

Questions/Practice Exam
D. If net exports are positive, there is a trade surplus.

1.

2.

In a small open economy, the interest rate is determined by the rate in the rest of the world. The economy of a small open country has a negligible effect on the world economy. The interest rate it faces is given by the world interest rate, since its financial markets are too small to influence it.

Exercise 1
Suppose that the expected inflation rate is 10 percent in France and 5 percent in Japan. The real interest rate is 3 percent in both countries. (Assume that France is the most important economy of the Euro Area)
a. What is the nominal interest rate in each country?

b. What are the expected changes in the real and nominal exchange rates?

Exercise 1 (Contd)
c. If the European Central Bank increases the money supply and inflation expectations rose to 12 percent in France, how would this change affect the expected changes in the real and nominal exchange rates?

Answer 1

a. i = r + e The nominal interest rate is the sum of the real interest rate and expected inflation. For France, this rate is 13 percent (3+10). For Japan, this rate is 8 percent (3+5).

Answer 1

b. Differences in inflation rates will lead to expected changes in the nominal exchange rate. % Change in e = % Change in e + (* - ) The Yen/Euro rate should decrease by the differential in expected inflation, which is 5 percent (5-10). An Euro will buy fewer Yen. The real exchange rate is not expected to change unless there is a fundamental change to savings, investment, or demand for net exports.

Answer 1
c. An increase in inflation expectations in France would lead to a higher expected decrease in the Yen/Euro exchange rate. This expected decrease is now 7 percent (5-12). % Change in e = % Change in e + (* - ) The real exchange rate should remain unchanged.

Exercise 2
The United States has run a trade deficit over the past two decades.
Has this deficit been good or bad for the economy? Be sure to discuss the implied change in net capital outflow and the advantages/disadvantages of this change

Answer 2
Over the past two decades, the United States has imported more than it has exported. This has been a benefit in the sense that consumers have been able to consume a wider array of goods and increase their standard of living. The potential downside of the increase in imports over exports is that the U.S. has had to sell assets in order to pay for the excess imports, i.e. net capital outflow has decreased due to the trade deficit. The US spent more than it produces by borrowing from abroad.

Answer 2 (Contd)
If the sale of U.S. assets (borrowing from abroad) results in foreign investment in profitable ventures, the U.S. will benefit in terms of strong growth of the economy and low unemployment.

If the trade deficit were to continue for several more decades, the concern would be over the size of foreign investment in the U.S. This could lead to problems seen in other countries when foreign investors suddenly lose faith in a country's economy. This loss of confidence can lead to a huge crisis as they quickly withdraw their investments.

Exercise 3
Consider the following data on the Transalpinian economy Y = 1,000 C = 650 G = 200 I = 250 - 20r*
The world interest rate is 7.5 percent. How does the world interest rate have to change to make net exports zero?

Answer 3
Y = C + I + G + NX If the world real interest rate falls to 5 percent, then investment will be 150, and C + I + G will be equal to Y, so that NX will be zero.

Exercise 4
You are presented with the following foreign exchange situation: you can trade dollars and pounds in London at a rate of 1.5 $/ and in New York at a rate of 1.6 $/ .
a. Show through an example if it is possible to profit from currency trading in New York and London?

b. Would you expect these rates to exist for long in the market place? Why or why not?

Answer 4
a. Suppose you start with $100. If you buy pounds in London, you will receive 66.67 pounds (100/1.5) for your $100. If you then return to New York and exchange this for dollars, you will receive $106.67(66.67*1.6). You will have just made a profit of $6.67. b. If everyone tried to make a profit in this manner, the high demand for pounds in London would drive up the value of the pound (an increase in the $/ exchange rate). The high demand for dollars in New York would drive up the value of the dollar (a decrease in the $/ exchange rate). This process would continue until the exchange rates are equal, at which point there is no opportunity to profit.

Exercise 5

If the nominal exchange rate is $1 equals 150 Japanese yen, and a Big Mac costs $2 in the U.S. and 300 yen in Japan. What is the real exchange rate of U.S. Big Macs for Japanese Big Macs ?

Answer 5
e=e
(P/P*)

A U.S. Big Mac would cost $2 x (150 yen/dollar) or 300 Japanese yen. This means that you could exchange 1 U.S. Big Mac for 1 Japanese Big Mac.
The real exchange rate is 1.