Answer all questions.
Show all your work — you must explain how you arrived at your answer.
Partial credit may be awarded if a substantial part of the answer is provided.
Question 1 (6 marks)
Suppose net investment income is N II = 100, the international asset position is
A = 3000, the international liability position is L = 4000, and the rate of return is 5
percent, r = 0.05.
(a) (3 marks) Economist John Green, a strong advocate of the dark matter hypothesis,
believes that A is not accurately recorded. Calculate the amount of dark matter and
the “true” international asset position, which we will denote T A, consistent with
Green’s view.
(b) (3 marks) Financial analyst Nadia Gonzalez does not believe in the dark matter hy-
pothesis. Instead, she believes that A is accurately measured. In her view 5 percent
is actually the rate of return on assets rA = 0.05, and the rate of return on the coun-
try’s international liabilities, rL, is different. Find the value of rL consistent with
Gonzalez’s view.