section9 - Econ 100B Section 101 102 Summer 2009 UC...

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Econ 100B Section 101 & 102 Summer 2009 – UC Berkeley Phakawa On Jeasakul August 3, 2009 Practice Problems 1. Mundell – Flemming Extension. This problem is to extend the Mundell – Flemming framework to incorporate risk premium and capital immobility for a small open economy. a. Derive the IS* curve and the LM* curve when some risk premium exists for borrowing and lending in the international financial market. b. Derive the IS* curve and the LM* curve when some restriction exists for borrowing and lending in the international financial market. Is there any difference between controls on capital inflows and controls on capital outflows? c. Suppose that the risk premium declines. Can you think for reasons for the decline in the risk premium? How does the decline in the risk premium affect the economy? Does the result depend on the exchange rate regime? d. Under the fixed exchange rate regime, what can the government and the central bank do in order to keep output unchanged? e. Under the flexible exchange rate regime, what can the government and the central bank do in order to keep output unchanged? 2. Policy Effectiveness in a Small Open Economy. This problem is to consider policy effectiveness in the Mundell – Flemming framework for a small open economy.
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section9 - Econ 100B Section 101 102 Summer 2009 UC...

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