QUIZ #4 : [TOPIC 4] 0401 -0402

▣ [Q1-Q6] National Income and Product Accounts Data of Emunistan

Category $

Consumption (personal consumption expenditures) 400

Investment (gross private domestic investment) 150

Government consumption (government expenditures) 80

Exports 210

Imports 60

Foreign income payments to domestic factors 20

Domestic income payments to foreign factors 10

Net unilateral transfers 5

1. The GNE is _______.

A) $900 B) $520 C) $630 D) $1,800 E) None of A – D

2. The trade balance for Emunistan is ______.

A) –$100 B) $0 C) $60 D) $100 E) None of A – D

3. The current account balance for Emunistan is ______.

A) $150 B) $155 C) $160 D) $165 E) None of A - D

4. The GDP for Emunistan is ______.

A) $150 B) $630 C) $850 D) $1,500 E) None of A – D

5. The GNDI for Emunistan is ______.

A) $780 B) $785 C) $790 D) $795 E) None of A - D

6. By how much is Emunistani national saving larger than its domestic investment?
A) $150 B) $155 C)$160 D) $165 E) None of A - D
[Q7- Q9] Examine how each of the following would affect the balance of payments of the home

country (=the US). Referring to the example case, specify i) which of (CA, KA, FA) accounts

changes in which direction, and ii) the resulting debit/credit amounts.

EXAMPLE: A California computer manufacturer purchases a $50 hard disk from a Malaysian

company, paying the funds from a bank account in Malaysia.

Q7. The U.S. central bank sells $500 million of its holdings of U.S. Treasury bonds to a British

financial firm and purchases pound sterling foreign reserves.

Q8. The central bank of China purchases $1 million of export earnings from a firm that has sold

$1 million of toys to the United States, and the central bank holds these dollars as reserves.

Q9. The U.S. government forgives a $50 million debt owed by a developing country.
 QUIZ #5 : [TOPIC 5] 0501

▣ For [Q1-Q6, consider the [BOX] and [FIGURE] below:

[BOX]

• Price level home (P) and abroad (P*) are both fixed at 1.

• The UIP condition holds: 𝒊 = 𝒊∗ + 𝟏𝟎𝟎(𝑬𝒆 ⁄𝑬 − 𝟏)

- Since the int. rate is in % terms, there is “100” before the expected rate of dep.

• C = 𝐶̅ + 0.75 × (𝑌 − 𝑇)

• Investment depends negatively on 𝒊 .

• TB= −0.25 × 𝑌 + 0.5 × (𝐸𝑃∗ ⁄𝑃)

• A certain IS curve labelled IS1 is shown in the [FIGURE].

* Since the exact form of the investment function is NOT given:

- you are NOT supposed to NUMERICALLY derive the IS curve

- so take the form of the IS1 in the figure as given SOMEHOW.

• All imports by the home country are for consumption purpose only.

• Exports of the home country depends on the real ER and foreign income level.

[FIGURE]
1. [True/False/Uncertain] If the economy is at point A, the goods market is in eq’m.

2. [True/False/Uncertain] If the economy is at point C, the foreign exchange market is in eq’m.

3. [True/False/Uncertain] If the economy is at point C, the level of aggregate demand is 3.

4. [True/False/Uncertain] If the economy is at point B, the level of output (Y) will start to increase.

5. [True/False/Uncertain] Compared with point A, the home country exports more at point C.

6. [True/False/Uncertain] The marginal propensity to consume home goods is 0.75.

▣ [Q7-Q11: answer with "in", "out", or "no shift" only] For each case below, specify

whether and in which direction the home IS curve moves.

7. A taxcut in the home country

8. A fall in foreign interest rate (while all other foreign variables are constant)

9. Imposition of quota on imports by the home government

10. A fall in home interest rate

11. A mass belief formed in the FX market that the foreign country will permanently double up

its money supply soon.

 QUIZ #6 : [TOPIC 5] 0502 -0504

▣ [Q12-Q14] For each case below, specify in which direction the home LM curve moves.

Use the [BOX] and [FIGURE] for the previous quiz.

12. An open market purchase by the home central bank

1) in 2) out 3) no shift 4) uncertain

13. Illegalizing all fin-techs (such as Apple Pay, Toss banking, Bitcoin, etc.)

1) in 2) out 3) no shift 4) uncertain

14. A fall in foreign interest rate

1) in 2) out 3) no shift 4) uncertain

Q15. Suppose that the money demand is 𝑀 = 𝑃 × (𝑌 − 𝑖). Given the initial levels of 𝑃⬚ = 1
and 𝑀 = 1, the equation of the LM curve is:

ⓐ i= Y-1 ⓑ i= Y+1 ⓒ i=2 ⓓ Y=3

[Hint] LM curve is the eq’m condition for the money market, i.e., MS = MD.

For Qs below, use [Handout 1].

Q1. Using the initial IS1 curve and the LM1 curve in HANDOUT 1, find the values of (Y, i) in the

initial eq’m. [Let us call this “Equilibrium 1”.]

ⓐ (3, 2) ⓑ (2,1) ⓒ (3,3) ⓓ (2,3)

[Hint] Combine the LM curve from Q4 with the IS1 , and find their “intersection” point.
Q2. Given the “Equilibrium 1”, find the values of (i, E, Ee) in the corresponding initial eq’m in

the FX market. [We also call this “Equilibrium 1”.]

ⓐ (2, 1, 1) ⓑ (1, 2, 2) ⓒ (2, 2, 2) ⓓ (1, 1, 1)

[Hint] In the initial LR eq’m, spot exchange rate should be equal to the expected rate.

▣ [Q3-Q6] are based on the [Situation M_tempo] described below:

[Situation M_tempo]

• The home currency is freely floating.

• The home country has been in the initial LR eq’m corresponding to [Situation 1].

• Today, there is a TEMPORARY increase in money supply from 𝑀 = 1 to 𝑀 = 2.

• People know the increase in MS is temporary.

• The new SR eq’m is called “Equilibrium M_tempo.”

► [Q3-Q6]: Find the values of (Y, i, E, Real ER) in Equilibrium M_tempo.

[Hint] You can find them by moving appropriate curves on the FIGURE.

i) The new LM2 curve with 𝑀 =2 is: i = Y -2, so the LM curve shifts out (or down) by 1 from

LM0. Then, you need to find the intersection with the invariant IS curve.

ii) In the FX market, does Ee changes? No, because people know the increase in MS is

temporary, so P and E will not be affected in the (new) LR. Therefore, the FR curve is invariant.

You need to find the intersection of the invariant FR and new DR line.
iii) Since both P and P* are fixed at 1, E  RER

Q3. Y ⓐ 2.5 ⓑ 3 ⓒ 3.5 ⓓ 4

Q4. i ⓐ 0.5 ⓑ 1 ⓒ 1.5 ⓓ 2

Q5. E ⓐ 0.5 ⓑ 1 ⓒ 1.5 ⓓ 2

Q6. RER ⓐ 0.5 ⓑ 1 ⓒ 1.5 ⓓ 2

▣ [Q7-Q11] are based on [Situation M_perma] below:

[Situation M_perma]

• The home currency is freely floating.

• The home country has been in the initial LR eq’m corresponding to [Situation 1].

• Today, the Home central bank PERMANENTLY increases money supply from 𝑀 = 1 to

𝑀 = 2.

• People know that the increase in M is permanent.

• The new SR eq’m is called “Equilibrium M_perma.”

Q7. How the expected ER changes following the permanence increase in M above?

(a) increase to 2 (b) decrease from 1 (c) decrease from 2 (d) none of a- c

[Hint] If PPP holds in the LR: a permanent increase in home MS → eventually, a permanent

increase in home P → eventually, a permanent increase in home P → eventually, a permanent

increase in E. So, the expected ER Ee will ….

Q8. Following the change in the expected ER from Q7, which of the IS and LM curves will shift

and in which direction?

(a) LM, in (b) IS, in (c) LM, out (d) IS, out
[Hint] The rise in Ee is a shift-out factor for the IS curve.

► [Q9-Q11] Suppose the magnitude of the shift in Q8 is 0.5. Taking all other changes (caused

by the permanent increase in the home money suppy) into account, find the values of (Y, i, E)

in the new SR eq’m, i.e., Equilibrium M_perma.

[Hint] Things to consider:

i) The shift (out by 1) of the LM curve due to MS ↑ in the first place.

ii) The shift of the IS curve as in Q12.

iii) Combine i) and ii) to find the new (Y, i).

iv) Finally, use the new i in the UIP condition with the new Ee from Q11.

Q9. Y ⓐ 3.5 ⓑ 3.75 ⓒ 4 ⓓ 4.25

Q10. i ⓐ 1.5 ⓑ 1.75 ⓒ 2 ⓓ 2.25

Q11. E ⓐ 4/3 ⓑ 8/3 ⓒ 12/3 ⓓ 16/3

 [Voluntary PQs for MID 2]

Q12. [T/F] Pricing-to-market behavior is a reason for the J-curve effect.

Q16. [T/F] Liquidity trap occurs when the opportunity cost of holding money is too high.

Q17. What policy actions can be effective in increasing output if the home country is stuck in

a liquidity trap?

▣ [Q13-Q15] Assume the following:

A1: There are two different groups of imports to Korea (=home country).

ㆍ The price of the first group (with a share of Φ in the basket of imports) is quoted in euro at

P1*= €10.

ㆍ For the second group of imports (with the remaining share of 1 - 𝛷), the price is quoted in

Korean won at P2* = \10000.

ㆍ Both P1* and P2* are fixed in terms of the currencies they are quoted.

A2: Currently, the Exchange rate is E\/€=1000 and the price of domestic products (i.e., goods

produced in Korea) is PK = \5000.

A3: The price of all imports relative to domestic goods (i.e., the real exchange rate) is the

weighted average of the relative prices of the two groups of imports.

Q13. What is the current real exchange rate?

► [Q14-Q15] Now suppose that the exchange rate rises from 1000 to 1100. Calculate the

degree of pass-through (i.e., the percentage increase in the real exchange rate caused by a 1%

increase in the nominal exchange rate).

Q14. When 𝛷=1: Q15. When 𝛷=0:

▣ [Q1-Q3: True/False] Suppose that the home country is in a LR eq’m under a credible
peg. Determine whether the following statements are true or false.

1. For the peg to be maintained, an exogenous increase in trade deficits (i.e., an exogenous
decrease in trade balance) should be counteracted by a monetary expansion.

2. If the peg is credibly maintained, the home interest rate is equal to the foreign rate.

3. By credibly pegging its currency to a foreign currency, the home country cannot implement
autonomous fiscal policy.

▣ [Q4 -Q8] Consider the [Situation_PEG_M]:

※ Use [Situation 1] & [FIGURE] provided for [Quiz # 5] and [Quiz # 6]

[Situation_PEG_M]:
• The home currency is pegged to the foreign currency.
• The home country has been in the LR eq’m corresponding to [Situation 1].
• Today, the Home central bank TEMPORARILY increases money supply from 𝑀 = 1 to
𝑀 = 2.
• People know the increase in M is temporary.
• The new SR eq’m under fixed ER is called “Equilibrium_PEG_M.”
4. Immediately following the increase in money supply, which of the IS/LM/FX curves shift (and
by how much in which direction)?
(a) LM in by 1 (b) IS out by 2 (c) LM out by 1 (d) IS out by 1

[Hint] Things to consider:

i) The shift of the LM curve due to MS ↑ in the first place.
ii) Does Ee changes if M is (and is correctly deemed as) temporary?
iii) Can E change under a peg?

► [Q5-Q7] Find the values of (Y, i, E) in Equilibrium_PEG_M.

5. Y =? ⓐ 2.5 ⓑ 3 ⓒ 3.5 ⓓ 4

6. i=? ⓐ 0.5 ⓑ 1 ⓒ 1.5 ⓓ 2

7. E=? ⓐ 0.5 ⓑ 1 ⓒ 1.5 ⓓ 2

[Hint] Things to consider:

i) Following MS↑, can E change under a peg?
ii) If not, what should the home CB do?

8. In view of your answers to [Q4-Q7] above, what can you say about temporary monetary
policy under fixed ERs?