Exercise 6 (Dark Matter Versus Return Differentials). Suppose net investment income is N II = 300, the net international investment position is N IIP = −2000, the international liability position is L = 5000, and the interest rate on international liabilities is 4 percent (r L = 0.04). Part 1: Economic consultant Jim Taylor, a strong advocate of the return differential hypothesis, maintains that the rate of return on the country’s international assets, denoted r A, is different from the return on its net international liabilities, r L. Find the value of r A consistent with Taylor’s view. Part 2: Economist Carol Powell does not support the idea of return differentials. Instead, she defends the dark matter hypothesis. Specifically, she believes that A is not accurately recorded and that the rate of return is 4 percent on both, A and L. Calculate the amount of dark matter and the ‘true’ international asset position, which we will denote T A, consistent with Powell’s view.
Exercise 6 (Dark Matter Versus Return Differentials). Suppose net investment income is N II = 300, the net international investment position is N IIP = −2000, the international liability position is L = 5000, and the interest rate on international liabilities is 4 percent (r L = 0.04).
Part 1: Economic consultant Jim Taylor, a strong advocate of the return differential hypothesis, maintains that the
Part 2: Economist Carol Powell does not support the idea of return differentials. Instead, she defends the dark matter hypothesis. Specifically, she believes that A is not accurately recorded and that the rate of return is 4 percent on both, A and L. Calculate the amount of dark matter and the ‘true’ international asset position, which we will denote T A, consistent with Powell’s view.
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