Dilla University
College of Business and Economics
Department of Economics
International economics II (Econ 3082) Worksheet for chapter 2,3,4 and 5.
Page | 1
Instruction: This worksheet is designed to help you prepare effectively for your upcoming final exam. Try to
solve independently then do in cooperation with your classmates.
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1. In the United Kingdom, a specific bundle of goods costs £250. In the United States, the
identical bundle of goods costs $500. According to the Absolute PPP theory, what should
be the exchange rate (S) expressed as pounds per dollar (£/$)? If the UK price level rises to
£300 while the US price remains $500, what is the new equilibrium exchange rate?
2. Suppose the annual inflation rate in Ethiopia is 15% and the inflation rate in Kenya is 5%.
According to the relative version of PPP, what is the expected percentage change in the
exchange rate of the Ethiopian Birr against the Kenyan Shilling?
3. The interest rate on a one-year government bond in the UK is 8%, while the interest rate
on a similar bond in the US is 3%. Based on the Uncovered Interest Parity (UIP)
condition, what is the expected rate of change in the pound-dollar exchange rate?
4. Today’s exchange rate is ⁄ per euro. The expected exchange rate one year from
now is ⁄ . If the interest rate on euro deposits ( ) is 4%, calculate the total
expected dollar return on euro deposits
5. The aggregate real money demand in an economy is given by . If the central bank
increases the nominal money supply ( ) from 1,000 to 1,200 units while the price level
( ) and real income ( ) remain constant, describe the numerical direction of the interest
rate ( ).
6. Why is PPP more likely to hold for “traded goods” (like laptops or coffee) than for “non-
traded goods” (like haircuts or housing)? How does a rise in the price of non-traded goods
affect the home currency's value under the generalized PPP model?
7. Identify and critically explain three major reasons why PPP often fails to hold in the short
run. Specifically, address how “transport costs” and “imperfect competition” prevent price
equalization.
8. According to the “flexible-price” monetary model, what is the long-run effect of a 10%
increase in the domestic money supply on the exchange rate? Furthermore, explain the
phenomenon of “exchange rate overshooting” in the short run.
Page | 2 9. A country records the following transactions for the year:
Exports of goods:
Imports of goods:
Exports of services:
Imports of services:
Unilateral receipts:
Unilateral payments:
Calculate the Trade Balance and the Current Account Balance.
10. A country is considering devaluing its currency to fix a persistent deficit. The foreign
elasticity of demand for exports ( ) is estimated at 0.4, and the home country elasticity of
demand for imports ( ) is 0.5. According to the Marshall-Lerner condition, will this
devaluation improve the current account? Why or why not?
11. An economy has a national income ( ) of $5,000 and a total domestic absorption ( ) of
$5,200. Calculate the Current Account ( ) status. If the government wants to reach a
equilibrium through the absorption approach without changing income ( ), by how much
must they reduce domestic spending?
12. Under a fixed exchange rate system, a nation’s money market is initially in equilibrium
( ). The Central Bank then increases the domestic money supply ( ) by 15%
while money demand ( ) remains constant. According to the monetary approach, what
will be the immediate impact on the Balance of Payments, and how will equilibrium
eventually be restored?
13. A country's records show a Current Account balance of , a Capital Account balance of
, and an Official Settlements balance of . Calculate the Statistical Discrepancy
required to ensure the accounts balance.
14. Explain why a currency devaluation might lead to an immediate worsening of the trade
balance before an improvement occurs (The J-Curve effect). Identify at least three types of
time lags that contribute to this delay.
15. Discuss the difference between automatic measures and deliberate measures for correcting
BoP deficits. Specifically, explain how the price adjustment mechanism works under a fixed
exchange rate (Gold Standard) system.
Page | 3 16. Critically evaluate the causes of structural disequilibrium versus cyclical disequilibrium.
How might a structural change, such as the exhaustion of a productive natural resource,
create a long-term BoP deficit?
17. While the absorption approach provides a macroeconomic view of the BoP, it has
significant limitations. Explain how ignoring relative prices and neglecting the terms of
trade effect can lead to an incomplete diagnosis of a country's trade health.
18. A country has a GDP of $500 billion. Its total exports are $75 billion and its total imports
are $125 billion. Calculate the degree of openness for this economy.
19. In an open economy, the leakage equations are given as and
. Injections are , , and . Find the equilibrium level of income
(Y) where Leakages = Injections.
20. Assume the money supply ( ) is fixed at 500. The transaction demand for money is
and the speculative demand is . Calculate the equilibrium
interest rate ) if the income level (Y) is 1,000.
21. A nation experiences equilibrium in its BoP when . If exports (X) are fixed
at 100, the import function is , and net capital flow is . If
the world interest rate is 5% and domestic income (Y) is 400, find the domestic
interest rate (r) required for BoP equilibrium.
22. Based on the Swan Diagram, if an economy has a Real Exchange Rate and Domestic
Absorption combination that results in a Current Account Surplus and Inflationary
Pressures, identify which Zone the economy is in.
23. Critically explain why the Internal Balance (IB) curve is downward-sloping while the
External Balance (EB) curve is upward-sloping in the Swan Diagram.
24. Explain Jan Tinbergen’s “instruments-targets rule” and discuss why using only devaluation
to fix both a trade deficit and high unemployment is unlikely to succeed.
25. Define the Macroeconomic Trilemma and explain why a country like Greece (in the
Eurozone) cannot conduct an independent monetary policy.
26. Critically evaluate why monetary policy is completely ineffective in a small open economy
Page | 4 with a fixed exchange rate and perfect capital mobility.
27. Discuss three potential impediments that prevent nations from successfully coordinating
their macroeconomic policies
28. What is the International Monetary System (IMS), and what are the three primary criteria
used to evaluate its effectiveness?
29. Explain the "Policy Trilemma" (Impossible Trinity) and identify the four distinct
international monetary systems that have existed since 1880.
30. Compare the primary purposes of the International Monetary Fund (IMF) and the World
Bank as established during the 1944 Bretton Woods Conference.
31. What is "Dutch Disease," and what are its two major negative economic effects on a
nation's economy?
32. Identify three factors that contributed to the debt problems of Less Developed Countries
(LDCs) and list the three general proposals for resolving such crises.