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# ECMC93_Assignment_2_Summer_2012.docx

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School
University of Toronto St. George
Department
Economics
Course
ECO230Y1
Professor
Iris Au
Semester
Summer

Description
ECMC93 – LEC 01 International Economics Assignment 1 Due: Wednesday, August 1, 2012, 1:30pm (Lecture) st (Note: Assignments submitted after 1:30pm on August 1 WILL NOT BE accepted under ANY circumstance.) Instructions:  You can submit an individual or group assignment.  If you submit a group assignment, there should be no more than FIVE students in your group and you just have to submit ONE copy.  A title page MUST be attached with your assignment; it MUST include your name(s), student number(s), and your lecture section(s).  Staple your assignment (Paper clip is not accepted).  A PENALTY OF 10% OF THE TOTAL MARKS WILL BE IMPOSED IF YOU DO NOT HAVE A TITLE PAGE AND THE REQUIRED INFORMATION or STAPLE YOUR ASSIGNEMNT.  Label your graph(s); otherwise, marks will be subtracted.  No credit will be given if you do not show your work.  Your answer should be structured in a way such that those know little about economics will have no difficulty in understanding your argument/answer.  Total marks: 100 points. Question 1 (20 points) – Chapter 10 There are only two countries in the world, ABC and XYZ. ABC has a current account deficit of \$200 billion, and capital account is 0 for both countries. a) Find ABC’s balance on the financial account. Explain. (2 points) b) Find XYZ’s current account and financial account balances. Explain. (4 points) c) If the stock of official reserves in ABC remains unchanged, what is the balance of ABC’s non-reserve portion of financial account? Does the private sector of ABC borrow or lend funds in the world financial market? Explain. (4 points) d) Now, consider what happens in XYZ. Suppose the central banks do not trade with the private sector, what would happen to the value of XYZ’s currency? Explain. (6 points) e) (Continued from part (d)) What happens to the stock of official reserves in XYZ? Explain. (4 points) ECMC93 Assignment 2 (Summer 2012) 1 Question 2 (20 points) – Chapter 10 India is a small open economy that has a flexible exchange rate. Currently, India has a balance of payments surplus. Since last summer India has experienced strong inflows of foreign capital. These capital inflows are partly caused by the troubles in the developed countries’ financial markets, as investors lose confidence when the sovereign debt crisis unfolded in the European Union. Note: Quote the exchange rate as E €/rupee a) Explain in words and a supply-demand diagram for the Indian rupee, what happens to the €/rupee exchange rate? What happens to India’s non-reserve portion of the financial account and balance of payments? (10 points) b) Now, suppose the Reserve Bank of India, the central bank of India, finds the change in the €/rupee exchange rate in part (a) undesirable. If it wants to keep the exchange rate fixed at the initial level, what should it do? What happens to the stock of official reserves held by the Reserve Bank of India? What happens to the balance of payments after the intervention from t
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