c11ffall99bc - ' QUESTION 1 ,(10 pants); 7 , 37 [The'just...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ' QUESTION 1 ,(10 pants); 7 , 37 [The'just elected president of Uruguay, hires to advice on eitchange rate? ' “ system to adopt; Uruguay is’ a small, open economy, ' from the. international capital markets.__", « (5 points) In order to reduce. the velatility’of the exchanger’ategthe new-gOVernment I ‘ 91} _ , .ithhinking of adopting a fixed exchange rate system; This decrease in uncertainty _ ‘_ ._ : ' . ' g 3 I , -_ could potentially enhance the ,confidenCe oftforeigninvestors when decidingto invest g; -_- ,. “ ‘ ‘ 3i in Uruguay. As an eXpert in the Smallopen‘emnomy IS-LM model,tyou know that a r i" drawback of a fixed eXchange rate is thatithe/gOVe‘mmmt loses control'onone of its * i i * Policy variablesteitherfi; T OngS) t0 ‘fiféci the OPtPEtltYel " ' ‘ is the ‘ 7 Explain conclusion ' I; I clear about'the effects on the interest rate; CapitalfloxVS; and, exchange’ratet (Notef in __ V; "f equilibrium); ‘ movement in the IS LM curves and the resulting equilibrium fifom; this policy. Be ,_ ‘ panels A andB,» rt isthe international interest rate. andEO denotes the initial l’ ; L the small open economy IS-LM model; You know that one of the jeXchange rate _, : i. 5- . ' " i regimesyou Studied in (:11 canavoid a recessionafierafall in H "7" : ‘ eXCliange rate system delivers the'ineffectivenessof fiscal policy onioutput‘k?‘ ’ ' L ‘ Explain hon? you reached, this conclusion in Panel B, shoWingthemovement in the IS and LM curves and there‘sulting ‘ L “ effects on the interest rate, capitaltflows, and eXchangj-e rate. I ' ' a , a .7; I ‘a'ywould the exchange rate afterthe'decrease i . [compared to the initial eqmlibriumiyi, ; . ;_~ n " - ~ twihich' takes the interest rate as given V , , ,y f ‘ policythameaatnsawaits ' ‘ * ' (Sipoi‘nts) The preSident to reduce the budget; deficit the L, i L L next years byreduCing the-number of public employees. However, he wants to avoid _ L '_ -‘ gcausing a recession as a result of this contractioiiary fiscal policy moveAgain; using g _ . I- j _ equilibrium firomthis-polyicy. Be clear about the V r l, 7 f. . ‘ QUESTiON 2‘ (20 points) : __ t ‘y ‘sCOnSider an ebonotny with the following SP relationship _ ' * p=p¢+0.'5 '+z ' where p andee are actualand expected rates, of inflation, )7 is the'log- output ratio'_(whei'e _‘ , Y =100*1n[Y/Y N] where YN is thenatural rate of real output) and z is a supply shOck. I 7 i I Assume that thenatural rate: of realloutput‘ growth" giszero, so that nominal GDP growth is r ’ , the same as excess nominal-l; GDP growth. Also aSsume that inflationary rezxpectz‘itions,pe ‘ .adjustaccordingto the following/rule; - W ‘ ‘ ' . ' ' ' L Supply shOcks have been absent in the last years and government has maintained a constant rate nominal GDP. growth of 1%»(i.e. yz=0randx=1 in all years up to and , ~ ‘ including 1999). ‘ The economy is in the steady state in 1999. V __ v I a‘) (2 points) Write the equations for andSP curve and sclve for the initial and V _‘p‘in’1999. ‘ r V / or. " ‘ - , _ (4 points) Suppose that in the year 2000, an uneXpected military‘conflict in Asia 2 ' causes a rise in government expendituresincreasing x to 3%. Find the year 2000 levels _ of I; and p, ' I L ' ‘ ' ‘ ‘ ' ' ' I ~: ‘0) (14 points) Suppose, that,y,due topreSidential'elections in the year 2002, the ‘ _ government as anobjeetive toiimpleinent Yto be V0 in theyea’r 21002; (i.e. j - - electors value stability); In order to 'iachi’evethisobjective, the goyermnent‘hasto f _ _ ‘ - announce a-‘constantgleVel‘ of for-the years 2002- The govemmentexpects no ‘. shocks during thesej'Z the level of be Chosen? ” - . ‘ 1_QUEsTION3(14points)T ‘ I L‘ Consider an economy Withrpositive labor-augmentingtechnological progress. I The production function for the economyis given by: , , r I g _ '_ ‘ '_ LYV=’F(K, XN), ,, L, where-X grows at a, rate x>0vand N grows‘at rate 114:0. (fliere'is-no_p0pulation, grOwth), and F is a-constant realms to scale production'functi‘on. g r _ ; y The economy is initially in steady state, where the; values of the capital stock and effective labor are K0 and XoNo, respectively. The savings rate 5 isconstant, and the r ‘ ‘ ' , depreciation rate is equal to zero. _ ' _ ' a), (3 points) What is the steady state condition that No, and X0 must satisfy? L, _ -_ (Hint: «What is steady State investment demand? What are savings per unit of effective ‘ , labor?'To gain intuition, you may use the graph [belowijNote that a, graphical answer is ‘ ,not sufficient.) ’ ' - ,- y-S,Inv Kim/(mo), ' , K/(XN) ’ I b) (Zipoihts) is the grow rate of caipi‘ta output the‘steady state? I I I ' I ’ Now suppose there is a" bile-tithe increase‘i‘n the number of workers dueto ° '_ immigration'(N goes up, and stays at the new level‘a‘flerwards). ‘_ ,r f5 ’e) (i) (2 points)"At the timethe increase doesotitputpet of effective labor I 1rises-fallotstaythesame?.Why‘z.’ 4 == “ 1 s , ‘ w * - _ ' '- (ii) :(2 points) Is; there any further change inbuitput per uni-t (if-effective labor after the ' change (if any) in output per unit of effective labor at the time the newworkers appear? If V ‘ t - I , so, does output per unit of effective labor rise or fall? Why? I, - ’ aid) poin‘tS) the steady‘state edrreSfiendinfgy t6 the'iiew leVel of N, is output pet unit of _V 7 ‘ , _’ effective labor higher,"lower er'the same as it Was before the increase-in, N? Why? ‘ .(flr’ 1 e) paints) the Steady state coneSpbndiiigte the new level of N,‘ is; per ,capita output L 1 ‘ 1 higher, lower or the same as. it Was beforethe increase (Assume that the ‘ ‘ " ‘ adjustment processtoek sonic time); - r - ‘L I investment on average over the period ,1 918571995?! YOUR Essay 1’ (18 points). 'Using'definitiens @d’ihadéls developed in the may; * _ _ .a. Explainithe relationship rough orders of magnitude among the government 4, ' budget defieit,’foreign investment or borroWi-ng, domestic saving,’ and domestic} ' ; Vb. ’Howkdiidthei'elatienshi,yibetuieen thesemgmmdestchange between 1995 and; , a " I ' 1998? «What were the causes ofthesechangesfgg,4, ‘ ' » a ' - \4 - Essay‘z (1-8 points). In its first year (up until last Friday) the mummified from; I 1 ' $1,17‘to $1 .‘01 and the Japanese yen had appreciated from 120 to theU. S, dollar to 102. _ at Using any‘approachate explaining excehange rates that you learned in the eourse, explain these exchange ratemovements._ ; a, -' - ' " r k ‘ -' ' ' ‘ b. the implicatiens of mouemmt fer Japanese economic policy? ‘ ...
View Full Document

Page1 / 7

c11ffall99bc - ' QUESTION 1 ,(10 pants); 7 , 37 [The'just...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online