Suppose that there are two large economies in the world, country A (the foreign country) and country B (the home country). Suppose that initially, both countries have a zero current account balance and the world real rate of interest is 5 percent. Suppose now that there is a technological innovation in country A (the foreign country) only. In this case, which of the following is correct? A. The world real interest rate will rise and country B (the home coun- try) will have a current account balance surplus. B. The world real interest rate will rise and country A (the foreign country) will have a current account balance surplus. C. The world real interest rate will fall and country B (the home coun- try) will have a current account balance surplus. D. The world real interest rate will fall and country A (the foreign

ENGR.ECONOMIC ANALYSIS
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Please answer both of the question with the solutions( how you got the final answers to both questions).
Suppose that there are two large economies in the world, country A
(the foreign country) and country B (the home country). Suppose that
initially, both countries have a zero current account balance and the
world real rate of interest is 5 percent. Suppose now that there is a
technological innovation in country A (the foreign country) only.
In this case, which of the following is correct?
6.
A. The world real interest rate will rise and country B (the home coun-
try) will have a current account balance surplus.
B. The world real interest rate will rise and country A (the foreign
country) will have a current account balance surplus.
C. The world real interest rate will fall and country B (the home coun-
try) will have a current account balance surplus.
D. The world real interest rate will fall and country A (the foreign
5
country) will have a current account balance deficit.
E. None of the above.
What is the risk premium on the foreign bond investment, if the domes-
tic interest rate is 4%, the foreign interest rate is 5%, and the expected
future appreciation of the foreign currency (i.e., depreciation of the do-
mestic currency) is 1%?
7.
А. 1%
В. 3%
C. 1.80%
D. 1.5%
E. None of the above.
Transcribed Image Text:Suppose that there are two large economies in the world, country A (the foreign country) and country B (the home country). Suppose that initially, both countries have a zero current account balance and the world real rate of interest is 5 percent. Suppose now that there is a technological innovation in country A (the foreign country) only. In this case, which of the following is correct? 6. A. The world real interest rate will rise and country B (the home coun- try) will have a current account balance surplus. B. The world real interest rate will rise and country A (the foreign country) will have a current account balance surplus. C. The world real interest rate will fall and country B (the home coun- try) will have a current account balance surplus. D. The world real interest rate will fall and country A (the foreign 5 country) will have a current account balance deficit. E. None of the above. What is the risk premium on the foreign bond investment, if the domes- tic interest rate is 4%, the foreign interest rate is 5%, and the expected future appreciation of the foreign currency (i.e., depreciation of the do- mestic currency) is 1%? 7. А. 1% В. 3% C. 1.80% D. 1.5% E. None of the above.
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