Economics 514 Final Exam 2010 Dr. Stokes

Answer questions 1 and 2 and 2 out of the remaining 3 questions on page 2.

1. 30 points. For parts b-e assume

a. State and define all terms in the Mundell policy equation.

b. Determine the direction and amount of a transfer necessary to maintain equilibrium assuming the terms of trade does not change.

c. Assuming I=120, if the countries were to allow the terms of trade to change, in place of the transfer, how much of a change would be required?

d. If the B country were not to grow , how much of a change in the terms of trade would occur?

e. Develop an expression for the change in A's welfare attributable to A's growth (for this problem assume B does not grow) and calculate the appropriate value.

2. 20 points

a. Define carefully the effective rate of protection.

b. Assume that good X is produced in A where per dollar

.29 = domestic steel

.11 = foreign steel

.17 = labor

.3 = imported parts

.28 = tariff on imported good X

.48 = tariff on imported parts

Calculate the effective rate of protection.

3. Answer all parts. Assume for your answer that arbitragers are coming into the country. In your answer define the exchange rates as the dollar price of one unit of the foreign currency.

a. Define carefully and show the relationship between spot speculation, time arbitrage and forward speculation assuming no intervention.

b. Contrast space arbitrage with time arbitrage and give example.

c. Show the diagram and discuss how the central bank would act to convert an arbitrage inflow to an arbitrage outflow.

4. Discuss in some detail the objectives of the recent proposal of the Fed to buy 600 billion of US bonds. Is this a good plan? How will this proposed plan impact:

a. Countries exporting to the US such as India and China.

b. US citizens planning a visit to Europe.

c. US citizens who have debts

d. US government interest costs.

5. Assume two countries A & B and two goods X and Y where X is labor intensive and Y is capital intensive. Country A is capital intensive. Answer true, false or uncertain and explain your answer.

a. Factor price equalization cannot occur if either A or B or both A and B are completely specialized.

b. If there are decreasing returns to scale in both countries, it is impossible for either country to specialize in the wrong direction.

c. If A is a large country and B is a small country it is possible for country B to gain by setting an optimum tariff.

b. Show graphically the conditions which factor price equalization will occur.

c. Show graphically the conditions under which factor price equalization will not occur.