Assignment 1

1.
A country's gross national product (GNP) is

A) the value of all final goods produced by its factors of production and sold on the market in a given time
period.
B) the value of all final goods and services produced by its factors of production, excluding land, and sold on
the market in a given time period.
C) the value of all final goods and services produced by its factors of production and sold on the market.
D) the value of all final goods and services produced by its factors of production and sold on the market in
a given time period.
E) the value of all intermediate goods and services produced by its factors of production and sold on the
market in a given time period.
2.
National income equals GNP
A)plus depreciation, plus net unilateral transfers.
B) less depreciation, plus net unilateral transfers.
C) less depreciation, less net unilateral transfers.
3.
Net unilateral transfers
A) are part of a national income.
B) are part of a country's product.
C) must be added to NNP in calculations of national income.
D) are part of a country's GNP.
E) Only A and C.
4.
Government transfer payments like social security and unemployment benefits are
A) included in government purchases.
B) not included in government purchases, but they are part of the investment component of GNP.
C) not included in government purchases, but they are included in the consumption component of GNP.
D) not included in government purchases.
E) included in government purchases but not in the GNP.
5.
In an open economy, private saving, , is equal to
A) I + CA - (G - T).
B) B) I - CA + (G - T).
C) C) I - CA - (G - T).
D) I + CA + (G - T).
E) I + CA + (G + T).
6.
The United States issues a $10,000 debt forgiveness to Argentina. How is this accounted for in the
balance of payments?
A) financial account, U.S. asset import
B) current account, Argentina transfer payment
C) financial account, U.S. asset export
D) current account, Argentina good import
E) current account, U.S. service export
7.
What is the expected dollar rate of return on euro deposits if today's exchange rate is $1.167 per euro,
next year's expected exchange rate is $1.10 per euro, the dollar interest rate is 10%, and the euro
interest rate is
5%?
A)11%
B) -1%
C) 0%
D)10%
8.
If the dollar interest rate is 10 percent, the euro interest rate is 6 percent, then
A) an investor should invest only in dollars.
B) an investor should invest only in euros.
C)an investor should invest only in euros if the expected dollar depreciation against the euro is 4 percent.
D) an investor should invest only in dollars if the expected dollar depreciation against the euro is 4percent.
E) an investor should be indifferent between dollars and euros if the expected dollar depreciation against
the euro is 4 percent.
9.
How many British pounds would it cost to buy a pair of American designer jeans costing $45 if
the exchange rate is 1.80 dollars per British pound?
A)30 British pounds
B) 20 British pounds
C)40 British pounds
D)10 British pounds
E) 25 British pounds
10.
What is the exchange rate between the dollar and the British pound if a pair of American jeans
costs 60 dollars in New York and 30 Pounds in London?
A)2.5 dollars per British pound
B)3.5 dollars per British pound
C)1.5 dollars per British pound
D)0.5 dollars per British pound
E) 2 dollars per British pound
11. Fill in the following table.

12. Compute how many dollars it would cost to buy an Edinburgh Woolen Mill sweater costing
50 British pounds for the following exchange rates.

.
13. What is the interest parity condition? Explain why the interest parity condition must
hold if the foreign exchange market is in equilibrium.
14. Show graphically a drop in the interest rate paid by euro deposits. What is the effect
on the dollar?
15. Show graphically a drop in the interest rate offered by dollar deposits and the effect
on the exchange rate.
16. An American buys a Japanese car, paying by writing a $30,000 check on an account
with a bank in New York. The Japanese company doesn’t want to hold dollar assets.
Instead, Bank of Japan is willing to offer the company Japanese Yen in exchange for the
$30,000 check. How would this be accounted for in the balance of payments for the U.S.
and Japan?

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1.

A country's gross national product (GNP) is

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