answers1 - Department of Economics ECON 182 (a) IEB for...

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University of California, Berkeley ` Fall 2007 Department of Economics ECON 182 Problem Set 1: Suggested Solutions Problem 1: National income accounting (a) “Domestic absorption” is a term for domestic resident’s spending: = C + I + G = 80 + 25 + 20 = 125 (b) Using the national income account identity, Y = C + I + G + NX 150 = 80 + 25 + 20 + NX NX = 25 So the values of EX and IM must satisfy NX = 25. For example EX = 50, IM = 25. (c) NFP payments from abroad – payments to foreigners = 20 – 70 = -50 (d) Q economic activity of the nationals, independent of location = Y + NFP = 150 + (-50) = 100 (e) CA = NX + NFP = 25 + (-50) = -25 (f) Recall that we can interpret the current account as the difference between domestic savings and investment. (Review its derivation in the slide notes if you are unsure of it.) CA = S – I S = CA – I = (-25) – 25 = 0 Thus, the savings rate is 0% (S/Y = 0/150 = 0). Problem 2: External balance
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University of California, Berkeley ` Fall 2007
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Unformatted text preview: Department of Economics ECON 182 (a) IEB for Palau C 1 + (1/1+r)*C 2 = Y 1 + (1/1+r)*Y 2 C 1 + (1/1.1)*C 2 = 420 (b) Graph and briefly interpret the IEB. Intercepts: C 1 axis: 420, C 2 axis: 462 (c) Since total wealth is 420, Palau will spend 210 in period 1 and 210 in period 2. (i) C 1 = 0.5*(420) = 210 C 2 = 0.5*(420) = 231 (Recall that p 2 = 1/1.1) (1/1.1) (ii) CA 1 = Y 1 – C 1 = 220 – 210 = 10 CA 2 = Y 2 – C 2 = 220 – 231 = -11 (iii) Graph: IEB (part a), points C 1 , C 2 , sample indifference curve (iv) r = 0 (p 1 = p 2 ) Problem 3: The current account See lecture slides for 3 interpretations of the current account (pick 2) 1. CA = EX-IM+NFP 2. CA = S-I 3. private/government savings (“twin deficits”) Problem 4: Balance of payments transactions (a) CA -150, FA +150 (b) KA -5000, FA +5000 Problem 5: Determining the current account (a) Graph with r sufficiently low for CA<0 (b) Graph with vertical savings, no change in investment. CA<, >, or = 0...
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This note was uploaded on 10/21/2008 for the course ECON 182 taught by Professor Kasa during the Fall '08 term at Berkeley.

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answers1 - Department of Economics ECON 182 (a) IEB for...

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