{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

midterm_sol - Department of Economics University of...

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Department of Economics University of California, Berkeley Spring 2006 Economics 182 Suggested Answers to Spring 2006 Midterm Part I: True, False, Uncertain 1. UNCERTAIN: Remember the identity CA = S - I = S g + S p - I = ( T - G )+ S p - I . Holding private savings and investment constant, an increase in fiscal deficit will be associated with an equal increase in CA deficit. For example, a fiscal expansion under a floating exchange rate leads to a depreciation of the currency and thus is eventually reflected fully in a CA deficit. However, changes in taxes often affect private savings also (for example a lower tax rate increases the fiscal deficit, but also might lower private savings), so that the correspondence between fiscal deficit and the CA is not one-to-one. Further, consider the case of a monetary expansion where currency depreciation improves the CA deficit, but is not associated with any change in the fiscal deficit. In that case private savings rise. 2. TRUE: Uncovered interest parity states that R - R * = Δ E e . PPP states that Δ E e = π - π * . These two relations imply that R - R * = π - π * R - π = R * - π * r = r * . 3. FALSE: As Chapter 17 states, with perfect asset substitutability, sterilized foreign exchange intervention on the part of the central bank will leave the money sup- ply unchanged, which leaves interest rates, and hence, exchange rates unaffected.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}