Country A pegs its currency to the dollar.
(1) Suppose that an unexpected appreciation occurs and the investors believe that the
government of country A will not allow further appreciation in the near future.
What will be the effects of the appreciation on output and on the interest rate? (8 分)
(2) Suppose that the appreciation is called for by the pressure from other foreign
governments in order to cut down the trade surplus that the country A has. Investors
believe that another appreciation is on the way and this process will continue for an
extended period of time. What will be the effects of the initial appreciation on
output and on the interest rate? (8 分)
China's foreign-exchange reserves passed the $1 trillion mark last year. As a rule of
thumb, a country only needs enough foreign exchange to cover three months' imports
(China's reserves can cover 15 months), or to settle its short-term foreign debt (China
has 5 times too many).
(1) Please state the possible cause(s) of China's fast-growing foreign-exchange reserves
and how it can be stopped, at least theoretically. (7 分)
(2) Most of China's foreign exchange reserves are invested in U.S. dollars, mainly
Treasury securities (U.S. government bonds). Economists argue that China is in fact
subsidizing rich American consumers. Please elaborate this argument. (7 分)
(3) China have domestic projects, including pension funds, education, health care, are
starving of funds. Why can't they use the huge foreign reserves on those projects?
(7 分)
Simon lives in Taipei. Each week he divides his transportation budget NT$600 between
bus rides and taxi rides. The cost of a taxi ride is NT$120 and the cost of a bus ride is
NT$15. These two transportation methods are neither perfect substitutes nor perfect
complements to Simon.
(1) Due to the rising oil price recently, the city government decides to raise the fare of
riding on the bus to NT$20. Please put bus rides on the x-axis and taxi rides on the
y-axis to illustrate Simon's budget set before and after the bus fare raise in the same
diagram. (3 分)
(2) In your diagram from part (1), please illustrate the effect of the rise in the bus fare
on Simon's choice of the number of bus rides and taxi rides that he will buy. Be sure
to indicate clearly in your diagram the substitution and income effects associated
with the fare increase. (7 分)
(3) In your diagram from part (1), please indicate the government's additional revenues
(denominated in taxi rides) generated by the fare increase. Note that the additional
revenues equal Simon's additional expenditures. (4 分)
An alternative proposal is to sell Simon a Super-Card pass. This Super-Card pass
will charge Simon an initial fee then allow Simon to continue to ride the bus at the
original NT$15 fare instead of the new NT$20 fare.
(4) Suppose that the Super-Card pass is priced at the level where the city government
can earn the same additional revenues (also in terms of the taxi rides) as those that
resulted from the fare increase. In a new diagram illustrate the budget line that
would result from Simon purchasing the Super-Card Pass at this price. Will Simon
buy the pass? Briefly explain your answer using your diagram. (7 分)
(5) Suppose that the city government prices the new Super-Card pass so that Simon
would be indifferent between purchasing the card and simply paying the higher
NT$20 fare. Illustrate in a new diagram the additional revenues that the city
government could raise if it charges Simon this price for the card. (7 分)
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