eco & ethics paper - ans

7/25/2019 Eco & Ethics Paper - Ans

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As"rs

SECT'ON ' ( ECONO)'CS

1. CChanges in the growth rate of labor productivity may be decomposed into

two components: (1) the growth in physical capital per labor hour, and (2)

technological change. The one third rule is useful in this decomposition.

2.

The nominal e!change rate is "uite simply the price of one currency relativeto another. #t is the "uote observed in currency mar$ets.

%. f the 'apanese government wants to maintain a constant e!change rate

between yen and the .. dollar, then it would most li$ely shift to a more

e!pansionary monetary policy, decrease its tari*s, or eliminate its "uotas. &

more e!pansionary monetary policy will decrease real yen interest rates,

reducing investment by foreigners in 'apan (decrease yen demand), and

increasing investment abroad by 'apanese investors (increases yen supplied).

+. uilding an electronics plant in e!ico will re"uire the -erman electronics

manufacturer to pay for e!penses (construction fees, salaries, administrative

e!penses, etc.) associated with the proect in pesos. Therefore, the

manufacturer will need to convert euros to pesos thereby increasing the

supply of euros in the foreign e!change mar$et and increasing the demand

for pesos.

/. f an &merican distributor is purchasing 0orean televisions, then the

distributor will need to sell dollars and purchase won. This action will supply

dollars to the foreign e!change mar$et. The sale of .. automobiles to

ietnamese consumers would increase the demand for dollars as ietnamese

consumers sell dongs and buy dollars. The sale of a .. company to a utch

investor would also increase the demand for the dollar in the foreign

e!change mar$et and increase the supply of euros as the utch investor sells

euros and buys dollars.

3. &4urchasing power parity states that e!change rates will change to re5ect

di*erences in in5ation between countries. #nterest rate parity states that

e!change rates must change so that ris$6adusted returns on investments inany currency will be e"ual.

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;. &

#. C#f the e!change rate rises above 11? yen @ the Aed can decrease the rate

by selling dollars (supply of increases, yen@ e!change rate falls) and,

conversely, if the e!change rate falls below 1?? yen@, the Aed can

increase the rate by selling yen@buying dollars.

1?.#f one buys 12? '4B, 2? buys 2,+?? '4B, which is the price of the

bottle of wine.

11.CThe percentage spread is the same irrespective of how the "uote is made.

The percentage spread is calculated as: (1.+%/ 1.+2/) @ 1.+%/ D 1?? E

?.3>;F

12.CAirst invert the 9. Then set up a bid6as$ matri!.

1.+>/? @ 1.?3>/ E 9;=

1./??/ @ 1.?3%= E 9


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1/.

J(forward rate 6 spot rate) @ spot rateK D (%3? @ number of forward contract

days)E J(?.?=/> 6 ?.?==;) @ ?.?==;K D (%3? @ >?)E 6 ?.123% or 6 12.3%F.

13.C&n e!change rate is a ratio that describes how many units of one currency

you can buy per unit of another currency. The numerator will be in the

currency in which the "uote is made, and the denominator is the other unit of

the currency you are comparing. & currency appreciates when it rises in

value relative to another foreign currency. Li$ewise, a currency depreciates

when it falls in value relative to another foreign currency. &n appreciation in

value of a currency ma$es that countryMs goods more e!pensive to residents

of other countries. The depreciation of the value of a currency ma$es a

countryMs goods more attractive to foreign buyers.

1;.CThe balance of payments (N4) e"uation is:Current &ccount O Capital &ccount O NPcial .#n order for relative 444 to hold, countries with higher rates of e!pected

in5ation should see their currencies depreciate.

2?.Colve for the e!pected in5ation rate for 0enya implied in the forward rate (i0)

by using the same formula for relative 444:

1 E ? D J(1 O in5ation6AC) @ (1 O in5ation6C)K1 E 0>/.;3=3 E 0>?.;;2 D J(1 O i0) @ (1 O ?.?>)K

i0 E 1/F

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SECT'ON '' $ ETH'CAL & *OFESS'ONAL STANDADS

21.&hermanSs comments about his sta* and the CA& 4rogram are all

acceptable.

22.artineau need not remove her name from the report, but she should

document the di*erence of opinion.

2%.CThe CA& #nstitute

eco & ethics paper - ans

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