Econ 161 - International Macroeconomics

Instructor: Jesus Sandoval-Hernandez

University of California Merced

Fall 2013

Sample Midterm Exam 2

Instructions: Answer all questions. To receive any credit you MUST show your work.
Note: This sample exam is lengthier than the real one.
1. Use the following information on a hypothetical economy, Rijkdom, for the year 2006.

a. Calculate Rijkdoms financial account balance.

b. Calculate the official settlements balance for Rijkdom..
c. Calculate net factor income from abroad for Rijkdom.
d. Calculate Rijkdoms GDP, GNI, and GNDI.
e. Calculate investment for Rijkdom.
f. Calculate Rijkdoms national savings and private savings.
g. Suppose that valuation effects imply a capital gain of $220 million on external wealth.
2. Consider the economy of Aureus. In Aureus, domestic investment is $300 million and its
residents earned $10 million in capital gains during 2006. Residents of Aureus purchased $150
million in new foreign assets during the year and foreigners purchased $120 million in Aureus
assets. Assume the valuation effects total $1 million in capital gains. Assume KA = 0.
a. Calculate the change in domestic wealth in Aureus.
b. Calculate the change in external wealth for Aureus.
c. Calculate the total change in wealth for Aureus.
d. Calculate domestic savings for Aureus.
e. Calculate Aureus current account. Is the CA in deficit or surplus?
3. Assume all dollar units are real dollars in billions. It is year 0. Russia plans to raise $24 billion
to finance domestic investment projects with a marginal product of capital (MPK) equal to 8%.
Russia has the option to borrow $20 billion from the rest of the world at the world real interest
rate, r* = 4%. After year 0, Russia neither borrows nor invests (I = 0 in all years except year 0).
Use the standard assumptions: no initial external wealth W (W-1 = 0), no government spending
(G = 0); and assume I = 0 except in year 0, and no unilateral transfers or capital gains (NUT =
KA = 0), so that there is no net labor income and NFIA = r*W. The projects start to pay off in
year 1 and all years thereafter. Interest is paid in perpetuity in year 1 and every year thereafter. In

addition, assume that if the projects are not done then Q = $300 billion in all years and PV(Q) =
7,800.
a. Should Russia fund these projects? Why?
b. From this point forward, assume the $20 billion in projects are funded and completed in year
0. If the MPK is 8%, what is the total payoff from projects in future years?
c. What is Russias Q =GDP in year 0 in $? In year 1 and later years in $?
d. At year 0, what is the new PV(Q) in $?
e. At year 0, what is the new PV(I) in $? What is the new PV(C) in $?
f. Assume that Russia is consumption smoothing. What is the percent change in PV(C)?
g. For the year the projects go ahead, year 0, calculate Russias CA, TB, NFIA, and FA.
h. What about in later years? State the levels of CA, TB, NFIA, and FA in year 1 and thereafter.
4. This question will compare the policies of the federal government and the Federal Reserve and
their likely effects on interest rates, exchange rates, output, and the trade balance during the midto late 1970s.
a. President Johnson and Congress passed large increases in government spending to finance
Great Society programs and the Vietnam War. Explain briefly how this affects the trade balance.
b. Beginning in the mid-1970s, Federal Reserve Chairman Arthur Burns sought to decrease
unemployment below its full employment level by decreasing interest rates. Does this require a
monetary expansion or contraction?
c. Illustrate the effects of the fiscal and monetary policies mentioned previously using the ISLM-FX market diagram. (Note the change in interest rates observed in [b]. )
d. State the effects of these policies on the following variables: output, interest rate, nominal
exchange rate, consumption, investment, and the trade balance.
5. For each of the following situations, use the IS-LM-FX model to illustrate the effects of the
shock. For each case, state the effect of the shock (increase, decrease, no change, or ambiguous)
on the following variables: Y, i, E, C, I, TB. Assume the government allows the exchange rate to
float.
a. Lump-sum taxes increase.
b. Foreign income increases.
c. Investors expect an appreciation of the home currency.
d. The money supply decreases.