Question 1. What determines the value of the exchange rate?
Question 2. Suppose that there are 10 million workers in Canada and South Korea and each worker in Canada and South Korea can produce 4 cars per year. A Canadian worker can produce 10 tonnes of grain a year, whereas a South Korean worker can produce 5 tonnes of grain a year. The following table shows the production of grain and cars for the two countries, Canada and South Korea.
1 Worker Cars Grain
Canada 4 10
South Korea 4 5
(a) For this situation, construct a table outlining the opportunity costs of producing grain and cars in Canada and South Korean.
(b) Graph the production possibilities frontier of the Canadian and South Korean economies.
(c) For Canada, what is the opportunity cost of a car? For Canada, what is the opportunity cost of grain? For South Korea, what is the opportunity cost of a car? For South Korea, what is the opportunity cost of grain?
(d) Which country has an absolute advantage in producing cars? Which country has an absolute advantage in producing grain?
(e) Which country has a comparative advantage in producing cars? Which country has a comparative advantage in producing grain?
Question 3. The international transactions for the country Kyleland for a given year are reported in the table below. (8 Marks)
Transaction Amount (billions of dollars)
Exports of goods & services 100
Imports of goods & services 130
Transfers to the rest of the world 20
Loans to the rest of the world 60
Loans from the rest of the world ?
Increases in official reserves 10
Net interest payments 0
a. What is the amount of loans from the rest of the world?
b. What is the current account balance?
c. What is the capital account balance?
d. What is the official settlements balance?
Question 4. Explain how each of the following will affect the relative values of the dollar and the euro:
a. Income growth higher in Canada than in Europe.
b. Inflation higher in Europe than in Canada.
c. A real interest rate higher in Canada than in Europe.