Econ 162-A1, A2 Kenny Christianson

Econ
162-A1, A2 Kenny
Christianson
Fall
2015 due: October 30

PROBLEM SET NUMBER SIX

1. Suppose that the
economy of Loserville has the following distribution of income:

first
quintile 10% of aggregate
income
second
quintile 15% of aggregate
income
third
quintile 20% of aggregate
income
fourth
quintile 25% of aggregate
income
fifth
quintile 30% of aggregate
income

a. From the information provided, please derive
a Lorenz Curve for Loserville. Show
graphically.
b. From the Lorenz Curve you have drawn, find
the Gini Coefficient.

2. Suppose that you wake up one morning and find
the following exchange rates:

$1 = ¥100
¥1 = €0.05
€1 = $0.50

a.
Given these exchange rates, can you profit from international arbitrage? Show and explain.
b.
Does Purchasing Power Parity hold in this example? Why or why not?

3. Assume that copper currently sells for $20
per pound in the United States, and for €10 per pound in Germany. The current exchange rate is €1 = $1.50. It
costs $1.00 to ship one pound of copper between the countries.
a.
Is it possible to profit from international arbitrage? Where should copper be purchased? Where should copper be sold? Show and explain.
b.
How would you expect the price of copper to change in both countries
over time?
c.
If prices are fixed, how would exchange rates have to adjust to bring
Purchasing Power Parity?

4. To find the U.S. balance of payments data, go
to

.bea.gov/”>http://www.bea.gov

From the BEA home page, click on
“Balance of Payments” under “International”, and then click on “News Release: International Transactions”. After reading the news article, answer the
following questions:
a. What are the recent trends in the U.S.
trade deficit in the past quarter? Why?
b. What are the major components of the Balance
of Payments that are discussed in the article?
Briefly, how have these been moving in the recent past?

5. Assume that you
have $100,000 to invest in either U.S. or French bonds. The U.S. bonds pay 5% interest, while the
French bonds pay 4% interest. Both bonds
mature in one year. The dollar currently
trades for 0.8 euros, and you expect the dollar to trade for 0.5 euros one year
from now. Which bond should you
purchase? Explain.

6. Go to the
Economist magazine website to read about the Big Mac Index:

.economist.com/content/big-mac-index”>http://www.economist.com/content/big-mac-index

Read the article and look at the table, and then answer the
following questions:

a. What is the “Big Mac” Index? What does it measure?
b. According to the table, which currencies are
most overvalued? Undervalued?
c. How would you expect the euro and yen to move
against the dollar based on the table?