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# ps7 - D EPARTMENT OF E CONOMICS U NIVERSITY OF C ALIFORNIA...

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D EPARTMENT OF E CONOMICS U NIVERSITY OF C ALIFORNIA , B ERKELEY F ALL 2009 ECON 182 Problem Set 7 Due in class on Thursday, October 29 at the beginning of lecture . Students that show their work and write neatly will be graded favorably. Please write your full name , GSI, and section time on your problem set. 1 Current account sustainability Turkey’s foreign debt to GDP is approaching 40%. Most of it is sovereign debt (i.e. it repre- sents government liabilities to foreign investors). Nominal interest rates on this debt equal 10%. Expected and actual inflation in Turkey are around 8%, while real output growth is predicted to be -2% in 2009. (a) Calculate the maximum current account surplus/deficit (as a percentage of GDP) that Turkey needs in order to stabilize the debt/GDP ratio at its current level. (b) Calculate the associated trade surplus/deficit that Turkey needs (Assume that net factor pay- ments equal to where denotes the nominal interest rate on Turkey’s nominal external debt ). (c) Turkey’s current account deficit is projected at 3.6% of GDP for 2009. Calculate the level at which the ratio of external debt-to-GDP will settle if the current account deficit remains at this level while the growth rate of GDP, the inflation rate and the nominal interest rate on Turkish debt remain unchanged. In your view, is the situation under control? 2 The balance sheet of China’s central bank The People’s Bank of China (the PBOC henceforth) is the name of China’s central bank, not to be confused with the Bank of China, which is a main commercial bank in China. The PBOC’s balance sheet as of June 2009 is as follows (in trillion yuans): The PBOC’s balance sheet 2002 2009 2002 2009 Assets 4.5 21.6 Liabilities 4.5 21.6 Foreign assets 1.9 17.2 Monetary base 4.1 12.6 Foreign exchange 1.8 15.9 Currency in circulation 1.7 3.4 Gold and other foreign assets .1 1.3 Bank deposits 2.4 9.2 Government deposits .4 2.4 Domestic assets 2.6 4.3 Self-issued bonds 0 6.6

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ps7 - D EPARTMENT OF E CONOMICS U NIVERSITY OF C ALIFORNIA...

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