ECN 202 Final Assignment

(Answer all with appropriate theories and graph)

1. A. Explain how nominal exchange rate affects real exchange rate.

B. Suppose that a chocolate bar costs 20 euros in France and 30 Singaporean dollars in
Singapore. If the exchange rate is 1.20 euros per Singaporean dollars, What is the real
exchange rate?

2. Suppose the economy is in recession. Policymakers estimate that aggregate demand is

$100 billion short of the amount necessary to generate the long run natural rate of output.
That is, if aggregate demand were shifted to the right by $100 billion, the economy would
be in long run equilibrium.
a. Explain the impact on the economy if the government chooses to use fiscal policy to
stabilize the economy and the marginal propensity to consume (MPC) is given as
0.75 with no crowding out.

b. If there is a crowding out effect and investment is very sensitive to changes in the
interest rate, should the government increase spending more or less than this amount?

3. Suppose, OPEC decides to cut down oil production, causing oil price to go up.
a. Explain with the help of an aggregate demand and aggregate supply diagram how
price level and potential level of output changes if the government does not take
any policy initiatives.
b. Now, suppose the government takes policy actions to bring the economy back to
its potential level of output. Recommend what possible policies the government
can take and explain with the help of a diagram how this will affect your answer
in part a.
4. Explain how the following transactions affect Bangladeshi NCO? Does this transaction
affect direct investment or portfolio investment?
i. Pran Foods Ltd. buys stock in Amul India Private Ltd.
ii. Walton buys parts from a Japanese manufacturer to use in the
production of its refrigerators.
iii. An US firm expands its outlets in Dhaka.
iv. A Korean mutual fund buys shares of stock in Beximco.

5. Suppose that the central bank sells government bonds. Use a graph of the money market to
show what this does to the value of money and price level.