NAME:_________________________________________
THE GEORGE WASHINGTON UNIVERSITY
Department of Economics
Economics 280
Section 11
Prof. Steve Suranovic
Spring 2010
Quiz #2 – Answers
1. (7) Write the term that is described by each of the following statements. Note that the
answer relates to the italicized word or phase.
A. the value of GNP if the current
account has a deficit of $200 billion and
domestic spending is $1.1 trillion.
B. Of paying off past debts or
accumulating new debts, what a country is
more likely doing if a debtor country has a
trade surplus?
C. Of borrowing from the rest of the
world or withdrawing previously
accumulated savings, what a country is
more likely doing if a creditor country has
a trade deficit?
D. name describing the exchange rate for
currency exchanges 60 days from now.
$900 billion
Paying off past debts
Withdrawing previously accumulated
savings
60-day forward exchange rate
E. what we would call a decrease in the
dollar/euro exchange rate.
Depreciation of the euro or
Appreciation of the dollar
F. the percentage change in the dollar
value with respect to the Japanese yen if
the exchange rate falls from 100 yen/$ to
95 yen/$
- 5%
G. the euro rate of return if the euro
interest rate is 1% and the expected
appreciation of the euro is 10%
+ 11.1%
(0.5 pt. for 11%)
2. (4) Approximate recent values for four country’s GDP, trade balance, and international
investment position is listed below. Refer to this data to answer to each question.
(billions of US$)
Spain
Brazil
South
Korea
South
Africa
GDP
$1600
$1550
$925
$275
Trade Balance (TD)
- $91
- $13
+ $35
- $18
- $1300
- $400
- $ 200
- $ 11
Net International
investment position (IIP)
A. (2) Which country’s economic situation can be said to be most worrisome based on its
trade deficit. Briefly explain why.
South Africa is highest % of GDP at 6.5% of GDP
B. (2) Which country’s economic situation is most worrisome based on its net international
investment position? Briefly explain why.
Spain is highest % of GDP at 81.2% of GDP
3. (4) The current dollar/euro exchange rate is 1.35. Suppose you plan to invest $1000 in a
simple interest one-year European CD paying an interest rate of 2% per year.
A. (3) Calculate the rate of return on this investment if you expect the dollar/euro exchange
rate to be 1.25 in one year. Show your work.
RoReuro = [1.25/1.35] (1 + 0.02) - 1 = -0.056 or about – 5.6%
or
RoReuro = 0.02 + [(1.25 – 1.35)/1.35] + 0.02[(1.25 – 1.35)/1.35]
= -0.056 or about – 5.6%
B. (1) What would the US interest rate on a one-year CD have to be to make the US deposit
more attractive?
Since interest rates are never set below zero, anything at or above 0% would make the
US deposit more attractive.