Question 1. Suppose the Chinese government reduced substantially its budget deficit in order to slow the high rate of domestic growth and rising inflation rate. Would the government’s policy be more effective or less effective if China’s investment demand (i.e., demand for gross private domestic investment) were highly elastic? In your answer, be sure to define what “highly elastic” means. Fully explain.
Question 2: Can a banking system’s excess reserves be negative? Explain. If they can and are negative, explain two ways the banking system can eliminate the deficiency. If they cannot be negative, explain why.
Question 3: Given the information below, use relative Purchasing Power Parity to determine what the Swiss franc/dollar exchange rate in 2005 should be. Be sure to explain which currency has appreciated and which currency has depreciated. Please show all work.
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1990
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2005
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Exchange rate:
Swiss francs per dollar
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SFR 1.5/$
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Your task is to fill in this blank, making sure you show all the work that went into calculating your answer.
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U.S. Price Index
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105
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115.5
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Swiss Price Index
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102
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106.1
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Question 4: Using the exchange rates below: Calculate the bid and ask dollar/Yuan exchange rates. Please show all work.
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Bid Rate
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Ask Rate
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Yuan / Euro
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10.00
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10.10
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Dollar/Euro
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1.20
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1.25
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Dollar/Yuan
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?
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?
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