f01_ps5

f01_ps5 - Problem Set 5 14.02 Fall 2001 1 True or false,...

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Problem Set 5 14.02 Fall 2001 1 True or false, explain (4 pts. each) 1. It is always true that a real devaluation increases exports, both in gross and net terms. 2. Expansive f scal policies that deteriorate the budget surplus, make domestic bonds relatively less attractive than foreign bonds and hence depreciate the currency. 3 .F ixedexchangeratesaregoodbecausenomatterhowmuchthe government spends the real value of the currency never changes. Hence the government has no incentive to spend. 4. Fixed exchange rates do not allow a domestic economy to adjust to a fall in export due to a foreign recession. 5. If we start from balanced trade, and a devaluation causes a greater percentage increase in the value of exports than a percentage fall in the quantity of imports, the trade balance will always improve. 6. If a devaluation causes a greater percentage increase in the value of exports than a percentage fall in imports valued in domestic prices, the trade balance will always improve. 2 Policy Abroad Questions (4 pts. each) Consider the goods market of an open economy described by the follow- ing behavioral equations. C = c 0 + c 1 ( Y T ) I = I k 0 i + k 1
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and government demand is exogenous. The behavior of imports is described by: Q = q 0 Y q 1 ² and the behavior of exports is given by: X = x 0 Y + x 1 ² with Y denoting the income of the rest of the world, and all para- meters are positive. Assume
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This note was uploaded on 11/29/2009 for the course 14 14.02 taught by Professor Geurrieri during the Fall '09 term at MIT.

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f01_ps5 - Problem Set 5 14.02 Fall 2001 1 True or false,...

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