Mock_Mid2 - π = π e.5(U – U N then the expected inflation will be set to 20 3 Suppose that Mr Modigliani will work 40 more years and live for

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
1. a. Consider the impacts of the increased US budget deficit on Brazil, a large open economy with flexible exchange rates. Assume that the US and Brazil’s general price level is fixed. i) What is the effect of the increased US budget deficit on Y, the nominal exchange rate and net exports in Brazil? (Assume perfect capital mobility with no anticipated exchange rate effect) Explain. ii) Explain what might be the consequences of the Brazilian central bank trying to maintain their initial exchange rate. 2. If the loss function of the central bank is L( π , U) = 2U + 4 π 2 and the Phillips curve is
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: π = π e- .5(U – U N ), then the expected inflation will be set to 20%. 3. Suppose that Mr. Modigliani will work 40 more years and live for 50 more. He will earn $10,000 per year for the first 20 and $20,000 for the subsequent 20 years. a. According to the life-cycle consumption theory, with no liquidity constraints, how much will he consume this year and how much 20 years from now (that is in year 21)? Explain. b. If instead he faces a liquidity constraint that prevents him from borrowing against future income, how much does he consume now and in 20 years? Explain....
View Full Document

This note was uploaded on 04/13/2008 for the course ECON 53 taught by Professor Barbezat during the Spring '08 term at UMass (Amherst).

Ask a homework question - tutors are online