Übungen zur Vorlesung Einführung in die Volkswirtschaftslehre VWL 1

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1 Übungen zur Vorlesung Einführung in die Volkswirtschaftslehre VWL 1 Übungen Kapitel 31/38 Beat Spirig

2 Aufgabe 31.4, UK capital outflow NCO = purchases of foreign assets by domestic residents purchases of domestic assets by foreigners A a) When a British mobile phone company establishes an office in the Czech Republic, UK net capital outflow increases, because the UK company makes a direct investment in capital in the foreign country. A increases. b) When a US company s pension fund buys shares in BP, net capital outflow decreases, because the US pension fund makes a portfolio investment in the UK. We are assuming the shares are newly issued or purchased from a UK resident. In fact, of course, many BP shares are already held by non-uk citizens. B increases. c) When Toyota expands its factory in Derby, England, UK net capital outflow declines, because a foreign company makes a direct investment in capital in the UK. B increases. d) When a London-based investment trust sells its Volkswagen shares to a French investor, UK net capital outflow declines (if the French investor pays in UK pounds), because the UK company is reducing its portfolio investment in a foreign country. A decreases. Beat Spirig 2 B

3 Aufgabe 31.7, Happiness a) US pension funds holding French government bonds would be happy if the euro appreciated. They would then get more dollars for each euro they earned on their French investment. In general, if you have an investment in a foreign country, you are better off if that country's currency appreciates. b) German manufacturing industries would be unhappy if the euro appreciated because their prices would be higher in terms of foreign currencies, which would reduce their sales. c) Australian tourists planning a trip to Europe would be unhappy if the euro appreciated because they would get fewer euros for each Australian dollar, so their vacation would be more expensive. d) A British firm trying to purchase property overseas would not care if the euro appreciated unless it were trying to buy property in the euro area. If it were trying to buy property in the euro area then it would be unhappy because it would get fewer euros per pound and could therefore afford to buy less property. Beat Spirig 3

4 Aufgabe 31.8, Real exchange rate r = ep P * a) If the Swiss nominal exchange rate is unchanged, but prices rise faster in Switzerland than abroad, the real exchange rate rises. b) If the Swiss nominal exchange rate is unchanged, but prices rise faster abroad than in Switzerland, the real exchange rate declines. r = ep P * c) If the Swiss nominal exchange rate declines, and prices are unchanged in Switzerland and abroad, the real exchange rate declines. d) If the Swiss nominal exchange rate declines, and prices rise faster abroad than in Switzerland, the real exchange rate declines. Beat Spirig 4

5 Aufgabe 31.10, Purchasing Power Parity If purchasing-power parity holds, then 12 pesos per can of lemonade divided by 0.75 per can of lemonade equals the exchange rate of 16 pesos per euro. If prices in Mexico doubled, the exchange rate will double to 32 pesos per euro. If PPP holds in the long run: e = P * P Beat Spirig 5

6 Aufgabe 31.11, Global rice market a) To make a profit, you would want to buy rice where it is cheap and sell it where it is expensive. Since American rice costs $1 per kilo, and the exchange rate is 80 yen per dollar, American rice costs (1 x 80) equals 80 yen per kilo. So American rice at 80 yen per kilo is cheaper than Japanese rice at 160 yen per kilo. So you could take 80 yen, exchange them for $1, buy a kilo of American rice, and then sell it in Japan for 160 yen, which you can then convert back to dollars and receive $2 a profit of $1. As people did this, the demand for American rice would rise, increasing the price of rice in America, and the supply of rice in Japan would rise, reducing the price of rice in Japan. The process would continue until the prices in the two countries were the same. (Assumptions?) b) If rice were the only commodity in the world, the real exchange rate between the United States and Japan would start out too low, then rise as people bought rice in America and sold it in Japan, until the real exchange became one in long-run equilibrium. Beat Spirig 6

7 Aufgabe 38.1a, Cornsylvania and Techoland Cornsylvania Techoland LAS P LAS P SAS SAS P 1 P 1 AD AD Y 1 Y Y 1 Y Beat Spirig 7

8 Aufgabe 38.1b,c,d, Cornsylvania and Techoland Cornsylvania Techoland LAS P LAS P SAS SAS P 2 P 1 P 1 P 2 AD 1 AD1 AD 2 Y 2 Y 1 Y Y 1 Y 2 Y AD 2 Beat Spirig 8

9 Aufgabe 38.1c i cornsylvania Interest rate decreases, investment increases. Leading AD in Cornsylvania to shift back right. M i techoland Beat Spirig 9 M Interest rate increases, investment decreases. Leading AD in Techoland to shift back left.

10 Aufgabe 38.1b,c, b) The fall in demand for agricultural products will hit Cornsylvania harder and so will lead to a fall in aggregate demand there. The increase in demand for electronic goods will have a bigger effect on Techoland and so aggregate demand will increase there. The level of output falls in Cornsylvania and so unemployment there will increase. There will downward pressure on prices. In Techoland the level of output rises and so unemployment falls. However there will be upward pressure on prices. c) Monetary policy may be used to offset the shifts in aggregate demand in each country. If interest rates were raised in Techoland then aggregate demand will be reduced, relative to what it would otherwise have been. So the aggregate demand curve would remain closer to its original position at AD 1 rather than moving to AD 2. As a result, the new short-run equilibrium will occur at a level of output closer to Y 1. There will be a smaller increase in output and less upward pressure on prices. Meanwhile, if interest rates were cut in Cornsylvania then aggregate demand will be increased, relative to what it would otherwise have been. So the aggregate demand curve would again remain closer to its original position at AD 1 rather than moving to AD 2. As a result, the new short-run equilibrium will occur at a level of output closer to Y 1.. There will be a smaller reduction in output and a smaller rise in unemployment. Beat Spirig 10

11 Aufgabe 38.1d d) If Cornsylvania is a net exporter of agricultural products and Techoland is a net exporter of electronic goods, then the reduced demand for agricultural goods and increased demand for electronic goods will reduce demand for cobs (the Cornsylvanian currency) and increase demand for bytes (the Techish currency). The cob will depreciate in value against the byte. [note: e defined as...quantity of foreign currency that exchanges for one unit of domestic currency (MT 2011, p.673). One cob can now buy fewer bytes. View from Cornsiylvania. The real exchange rate would decrease as well because P decreases and P* increases. PPP is not relevant here in the adjustment phase because its a long run concept.] The cob becomes cheaper. This will make Cornsylvanian goods cheaper relative to Techish goods, leading to increased demand for them. The result is that aggregate demand in Cornsylvania will be increased, relative what it would otherwise have been (NX for Cornsylvania rises). So the aggregate demand curve would remain closer to its original position at AD 1 rather than moving to AD 2. As a result, the new short-run equilibrium will occur at a level of output closer to Y 1 there will be a smaller reduction in output and a smaller rise in unemployment. The effect is similar as for the situation in which interest rates are cut in Cornsylvania in part c above. Meanwhile, Techish goods will have become more expensive. The result is that aggregate demand in Techoland will be reduced, relative what it would otherwise have been (NX in Techoland decreases). The aggregate demand curve would again remain closer to ist original position at AD 1 rather than moving to AD 2. As a result, the new short-run equilibrium will occur at a level of output closer to Y 1 there will be a smaller increase in output and less upward pressure on prices. The effect is similar as for the situation in which interest rates are raised in Techoland in part c above. Beat Spirig 11

12 Aufgabe 38.2, Currency Union Given both countries are of equal size the president of the central bank would keep the interest roughly the same. Charged with maintaining low and stable inflation across the currency union as a whole, it would be inadvisable to cut interest rates to assist the unemployed of Cornsylvania because doing so would lead to still higher inflationary pressures in Techoland. (If Techoland were smaller than Cornsylvania, of course, then its inflation rate would have a smaller impact on the inflation rate across the currency as a whole and the central bank president would be more likely to pursue an expansive monetary policy. And if Techoland were larger than Cornsylvania then the central bank president would be inclined to a contractory monetary policy because of the rising average price level across the currency union as a whole.) Beat Spirig 12

13 Aufgabe 38.3, Common Fiscal Policy Cornsylvania Techoland LAS P LAS P SAS SAS P 1 P 1 AD 2 AD 3 AD AD AD 2 AD 3 Y 1 Y Y 1 Y Beat Spirig 13

14 Aufgabe 38.3a, Common Fiscal Policy Fiscal policy can alleviate output fluctuations. In Cornsylvania the government has cut taxes or boosted government spending, so shifting aggregate demand to the right, from AD 2 to AD 3 and thus increasing output and reducing unemployment. In Techoland the government has raised taxes or cut government spending, so shifting the aggregate demand curve to the left, from AD 2 to AD 3 and thus reducing output and inflation. Beat Spirig 14

15 Aufgabe 38.3b b) The time lags involved in implementing fiscal policy changes make it debatable whether such a policy is advisable. By the time the policy takes effect we might expect that price and real wage adjustment would have begun to move the economies of Cornsylvania and Techoland back towards long-run equilibrium at Y 1 anyway. This adjustment would be assisted by the operation of automatic fiscal stabilizers as tax revenue fell in Cornsylvania and rose in Techoland, while spending on benefits to the unemployed rose in Cornsylvania and fell in Techoland. There is a risk that the use of discretionary fiscal policy might actually destabilize the economies by boosting aggregate demand in Cornsylvania and reducing it in Techoland just when the economies approached long-run equilibrium again. So it may be argued that discretionary fiscal policy changes are inadvisable and the governments of the two countries should rely on the automatic stabilizers and price and wage adjustment to restore long-run equilibrium. Beat Spirig 15

16 MC 31/38 a) Ein Handelsbilanzdefizit geht mit einem Kapitalverkehrsbilanzüberschuss einher und vice versa. b) Wenn mit inländischer Währung mehr von der ausländischen Währung gekauft werden kann bedeutet dies, dass sich die inländische Währung abgewertet hat. c) Das Konzept der Kaufkraftparität ist kurzfristig ausgelegt. d) Eine gemeinsame Währung reduziert die Transaktionskosten zwischen den Ländern und erhöht tendenziell den Handel unter ihnen. e) Die Kosten einer Währungsunion bestehen unter anderem darin, dass die Länder ihre eigene Geldpolitik verlieren. f) Der Euro wurde um die Jahrtausendwende hauptsächlich aus ökonomischer Notwendigkeit eingeführt. Beat Spirig 16

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