UNIVERSITY OF TORONTO MISSISSAUGA
ECO365 (L0101) - International Monetary Economics
Prof. Margarida Duarte
Term Test - October 7, 2011
Instructions: This is a closed-book exam. Non-programmable calculators can be used. Read
the entire question before answering. Make all the extra assumptions you consider necessary,
but make sure to state them clearly. Be concise in your answers. Good luck!
1. (15 points, 5 points each) Deﬁne concisely each of the following:
a. Spot exchange rate
b. Forward exchange rate
2. (25 points) You need to prepare the Balance of Payments of country ABC in 2010.
a. (20 points, 4 points each) Below is the list of all transactions between residents of ABC
and foreigners in 2010. Describe and classify the two entries in the balance of payments
accounts that each transaction generates.
i. During 2010 farmers from ABC exported bananas worth $22,500. A payment of
$20,000 was received in cash and the remaining amount will be received in 2011.
ii. Tourists from ABC spent $10,000 in hotels, meals, and other services abroad in
iii. An art collector from ABC oﬀered a statue worth $500 to a museum in London.
iv. Canadian banks forgave $5,000 in debt owed to them by the government of ABC.
v. Imports of consumption goods and machines totalled $25,000. Half was paid in
cash and the remaining is still owed.
b. (5 points) What were the balances in the current, ﬁnancial, and capital accounts of
ABC in 2010?
3. (25 points) Equilibrium in the foreign exchange market is characterized by the condition
∗ E − E
R = R + E ,
1 where E denotes the spot exchange rate today, E is today’s expectation of the spot exchange
rate one year from today, R is the rate of return on a one-year deposit denominated in