# Hong Kong Baptist University by EjPcPY3

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```									                         Hong Kong Baptist University
Department of Economics
ECON3110 International Economics
2000/01 First Semester
Mid-Term Examination, November 10, 2000
Instructor: Dr. Bill W. S. Hung

Part I: Answer all the questions. (25%)

Given the following transaction items:
(a) A Hong Kong firm imported of \$1,000 worth of PCs from a US businessman Mr.
John who has agreed to paid in six months.
(b) The US Businessman Mr. John's payment with a check that is drawn on his Hong
Kong's bank account after the six-month period has expired.
(c) The purchase of \$5,000 worth of DELL stock in New York by HKG's resident Mr.
Lee.
(d) Mrs. Young mail a package of electric toys that worth \$500 as a Christmas gift to her
(e) Mr. Cheng receipt a check of \$2000 dividend from IBM and deposit it into his
Citibank account in New York.

1. Record each of the transaction items with double-entry bookkeeping (debited and
credited) in the Hong Kong's Balance of Payments. (10%)
2. Using the debit and credit entries that you have constructed in Question #1 above,
and assuming that those five transactions were the only international transactions
during the time period, construct the balance of payments summary statement for the
time period. Indicate the balance amounts and the meaning of the "balance of trade,"
"balance on goods and services", "current account balance", "basic balance", and
"capital account balance". (5%)
3. In general, (a) what is the economic meaning of balance of payments disequilibrium?
And (b) how can such disequilibrium be eliminated? In other words, what forces
bring about a restoration of balance of payments equilibrium? Briefly explain. (10%)

Part II: Answer any three out of six questions. (75%)

4. (a) Briefly explain the difference between absolute and relative PPP. (8%) (b) Briefly
explain what is the meaning of "overvalued of a currency. (8%) (c) Would you
change your explanation depending upon whether or not there is central bank
intervention or not? Discuss. (9%)

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5. Suppose in Frankfurt the exchange rate of £/US\$ is 0.5, while in New York the rate of
DM/US\$ is 2.5 in New York, but in London the rate of £/DM is 0.1.
(a) Is there any arbitrage profit that could be made with a triangular arbitrage action?
Describe an example of how such a profit may be earned. (13%)
(b) What would you guess about the relationship between the US dollar rates and
cross-rates after arbitragers notice this profit opportunity? (12%)

6. (a) Suppose, under fixed exchange rates, you find evidence of sterilization. What
does it mean regarding the ability of central bank to following independent monetary
policies? (13%) (b) What does sterilization imply regarding the causality between
domestic credit and reserve flows under fixed exchange rates? (12%)

7. (a) Explain how exchange rate can overshoot their long run equilibrium level? And
what are the important assumptions to the overshooting model. (13%) (b) What is the
most important factor that affecting the adjustment path back to the long run
equilibrium level? (12%)

8. What are the similarities and differences between the "monetary approach" and the
"portfolio-balance approach under the flexible regime? (12%) Briefly explain the
effect of an unexpected increase of money supply to the exchange rate, and state the
expected change of the exchange rate. (13%)

9. Under a flexible exchange rate system, change in the foreign price level will affect
the domestic BOP and real sector, explain what will be the result to the changes in
home interest rate, income and exchange rate from the IS/LM/BP model analysis.
(25%)

10. The US dollar depreciated sharply against the yen in the early 1990s, and yet the US
net imports from Japan continued to rise in the short run. How might this
counterintuitive behavior be explained?

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