1. As a result of Korea's recent recession and currency problems the Korean media has been encouraging people to increase their savings rate (and consume less).
a. show the short run impact of a higher savings rate using Aggregate Supply and Aggregate Demand. What happens to Korea's National Income and Price level?
b. show the long run impact using the open economy macro model we discussed in class. What happens to real interest rates, net foreign investment, the balance of trade, and real exchange rates?
2. Another response to the economic problems in Korea has been widespread concern about imports.
a. If people buy fewer imports, what short run effect will there be on Korea's Aggregate Supply or Aggregate Demand? How would this effect their National Income and Price level?
b. Use the open economy macro model to examine the long run effect of purchasing fewer imports.
3. Calculations
a. In 1972, The Hamilton Pulsar, a newly invented digital watch, sold
for $2100.
If the CPI in 1972 was 46.5, what was the real price of this watch?
b. In 1990, a luxury cruise cost $5500. The CPI in 1990 = 131.5. What was the real price of the cruise?
c. In relative terms which was more expensive, the watch or the cruise?
d. A treasury bill pays 5.4% interest in 1998. The inflation rate is 1.9%. What is the real rate of interest?
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c. what would the be the value of net foreign investment?
6. If gold is selling for $300 and the US dollar is worth 110 yen, how much would gold cost in yen?
7. If the CPI in the US is 210 and the price index for the same goods in Canada is 250, use the idea of purchasing power parity to predict the exchange rate.
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