ECO365 Fall 2011 Term Test

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Margarida Duarte

UNIVERSITY OF TORONTO MISSISSAUGA ECO365 (L0101) - International Monetary Economics Prof. Margarida Duarte Fall 2011 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 c. Depreciation 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 2010. 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
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