1. Suppose quotes for the dollar-euro exchange rate Es/e are as follows: in New York $1.05 per euro, and in Tokyo $1.15 per euro. Describe how investors use arbitrage to take advantage of the difference in exchange rates. Explain how this process will affect the dollar price of the euro in New York and Tokyo. 6. Consider each of the following goods and services. For each, identify whether the law of one price will hold, and state whether the relative price, 93 US/Foreign, is greater than, less than, or equal to 1. Explain your answer in terms of the assumptions we make when using the law of one price. a. Rice traded freely in the United States and Canada. b. Sugar traded in the United States and Mexico; the U.S. government imposes a quota on sugar imports into the United States c. The McDonald's Big Mac sold in the United States and Japan. d. Haircuts in the United States and the United Kingdom

Why does the trade balance and the current account balance track so closely together over time?

Suppose that political unrest in Egypt leads financial markets to anticipate a depreciation in the Egyptian pound. How will that affect the demand for pounds. supply of pounds, and exchange rate for pounds compared to, say, U.S. dollars?

Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?

Imagine that the U.S. economy finds itself in the following situation: a government budget deficit of 100 billion, total domestic savings of 1,500 billion, and total domestic physical capital investment of 1,600 billion. According to the national saving and Investment Identity, what will be the current account balance? What will be the current account balance if Investment rises by 50 billion, while the budget deficit and national savings remain the same?

Explain briefly whether each of the following would be more likely to lead to a higher level of trade for an economy, or a greater imbalance of trade for an economy. Living In an especially large country Having a domestic investment rate much higher than the domestic savings rate Having many other large economies geographically nearby Having an especially large budget deficit Having countries with a tradition of strong protectionist legislation shutting out imports