Author Question: Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make ... (Read 61 times)

Mollykgkg · **on:** Jun 29, 2018

Bobby is offered a job as a salesperson in which there is a 50 percent chance that he will make 2,000 and a 50 percent chance that he will make 10,000. Bobby's utility of wealth curve is shown in the figure above. What is Bobby's cost of risk?

A) 1,000
B) 2,000
C) 3,000
D) 4,000

Question 2

The citizens of Exland, whose currency is the bun, conduct the transactions outlined in the table above.

a) What is Exland's current account balance?
b) What is Exland's capital account balance?
c) What is Exland's official settlement balance?
d) What is Exland's net foreign borrowing?

Ksanderson1296 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

B

Answer to Question 2

a) The current account balance equals exports minus imports: 700 - 600 = 100 billion buns.
b) The capital account balance equals foreign investment in Exland minus Exland's investment abroad: 350 - 430 = -80 billion buns.
c) A country's official settlement balance is the change in its official reserves. If official reserves increase, the official settlement balance is negative. So Exland's official settlement balance is -20 billion buns.
d) A country's net foreign borrowing is the difference between its borrowing from the rest of the world and its lending to the rest of the world. Exland's foreign borrowing is the foreign investment in Exland (350 billion buns). Exland's foreign lending is its investment abroad
(430 billion buns) plus the increase in the official holdings of foreign currency (20 billion buns). So Exland's net foreign borrowing is 350 - 430 - 20 = -100 billion buns, which means the country is a net foreign lender.