Global Econ Hw5

FINA 4621; The Global Economy (Macro)

Homework 5

1 Real Exchange Rate

1.1.- Real Exchange Rate Intuition

a) What is the real exchange rate (qUS/Au) between the US and Australia assuming the following transaction can be made:

You measure the price in dollars of a basket of goods in the US, and you take that number of US Dollars, change them for Australian Dollars and try to buy the same basket of goods in Australia, and find you can get 1.5 times as many goods as you got in the US.

Qus/Au=0.667

b) Using the nominal exchange rate above (EBr/$=1.75), obtain the real exchange rate (qUS/Brazil) between Brazil and the US if the same basket of goods costs $10 dollars in the US and 15 Reals in Brazil.

QBr/$=(1.75)*(10/15)=1.167

1.2.- Suppose that exports of goods and assets from US to Brazil are a function of their price relative to goods and assets in Brazil, say XUSG+A = 0.8tn +0.5tn*qUS/BR and that the same is true for Brazilian exports of goods and assets to the US, say XBRG+A =2tn-0.5tn*qUS/BR

a) What is the equilibrium real exchange rate qUS/BR?

0.8tn+0.5tn*q=2th-0.5tn*q

1tn*q=1.2

Qus/BR=1.2

1.3.- Describe the effect of these events on the real exchange rate between the US and Brazil: (up down, no effect)

a) Brazil’s demand for US products increases

Qus/brazil will decrease

b) US supply of products to the export market increases.

PLEASE NOTE: Avoid getting confused here. The right way to think about this issue is that, by trying to export more a country is increasing its demand for the other’s assets.

Qus/brazil will increase

c) Both money supply and prices increase 20% in Brazil. The nominal exchange rate also moves 20% in line with the rest of the prices.

No effect

2 Balance of Payments

2.1 a)What equation is satisfied by the current account and savings and investment?

CA=(Y-T-C-(G-T))-I

b) Explain intuitively why this identity holds.

Intuitively this identity holds because if you have higher...