4 Homework Questions

1. If a pair of shoes in the United States costs $45, and a pair of the exact same shoes is sold in Mexico for 430 pesos while the exchange rate is = $0.1100/pesos, what arbitrage opportunities exist (if any)? Ignoring transactions costs, explain how you would take advantage of this.









2. Use the below table to answer the following questions:

Country Exchange rate per dollar Price in local currency
South Africa (rand) 8 3,500
Brazil (real) 2.2 1,200
India (rupee) 45 18,000
Mexico (peso) 10 6,000


a. Suppose a computer costs $500 in the United States. Looking at the actual prices, does the PPP hold between U.S. and Brazil? If PPP were to hold at the nominal exchange rate provided, what would be the price of a computer in Brazil?


b. Suppose a computer costs $500 in the United States. With the price of the computer given in local currency in India, is the Indian rupee overvalued or undervalued? By how much (in percent)?










Category Billions of dollars
Consumption 400
Investment 150
Government spending 80
Exports 210
Imports 60
Foreign income payments to domestic factors 20
Domestic income payments to foreign factors 10
Net unilateral transfers 5


3. Using the hypothetical U.S. national income and product accounts data from the above table, answer the following:

a. Calculate GNE.

b. Calculate the trade balance.

c. Calculate GDP.

d. Calculate GNI.

e. Calculate net factor income from abroad.

f. Calculate the value of current account.

g. Calculate GNDI.

h. Calculate national savings for U.S.





Country Exchange Rate Money Growth Real Income Growth
United States   4% 2.5%
Mexico 0.25 $/peso 6% 5%
UK 1.5 $/GBP 2% 2%
France 1.2 $/euro 7% 4.5%



4. Use the table above. If you were to predict the $/euro exchange rate, what would the expected exchange rate be? If the Federal Reserve wants the dollar to depreciate against the euro in the long run, what monetary policy should they implement to ensure that?

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