Assignment 2 - the world real interest rate the world...

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Introduction to Macroeconomics, Fall 2006 (mishra) Assignment 4 Due: Thursday, Dec 7th This assignment may be completed in groups not to exceed 2 students. If you work as a team please turn in only one copy of the assignment. Each member will receive the same grade. 1. Consider the United states, a large open economy, during a period when it ran a current account deficit, such as the 1990’s. Use the model of a large open economy to predict what happens if the supply of saving in the rest of the world increases. (This may be due to, for example, an increase in saving in China, which is due to its increase in income.) a) Illustrate the determination of the initial equilibrium interest rate, the current accounts of the United States and the rest of the world. (Label all three of your graphs carefully) b) Now show the effect of a shift in the supply of saving in the rest of the world. Draw a new set of figures to show your work clearly. c) What happens to the equilibrium value of
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Unformatted text preview: the world real interest rate the world quantity of saving and investment saving and investment in the United States the current account of the United States saving and investment in the rest of the world the current account of the rest of the world d) Does this change cause a capital inow into or a capital outow from the United States? Explain. . 2. Compare and contrast between purchasing power parity and interest rate parity. It may be easier to explain with examples. 3. What do you understand by nominal anchor? Why is it useful? 4. (Bonus Question: open ended) In the NFL, when a particular player is not playing well, say the quarterback, then the coach has to decide whether to continue with the player. Please provide 2 or 3 economic principles the coach can use in making the decision. (Remember, economic does not necessarily mean nancial). 1...
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