Problem+Set+6 - the current account b Do you find that the...

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Department of Economics Fall 2011 University of California, Berkeley Econ 182 Problem Set 6 Due on Thursday, October 13, in lecture. Please, write your full name , GSI , and section number on your problem set. Problem 1 Aggregate Demand Shocks, Monetary Shocks and the Current Account Consider the following comment: “The current account depends upon income and the real exchange rate. If income rises, consumption of imports is high and the current account worsens. Thus, if monetary policy is the only tool that authorities can respond with quickly, a worsening of the current account due to a rise in income (for example, because of a temporary tax cut) requires a monetary contraction to moderate the rise in income and stop the deterioration of the current account.” a. Use the AA-DD-XX diagram to analyze the effects of a temporary tax cut on income and
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Unformatted text preview: the current account. b. Do you find that the current account worsens and that income rises, as suggested in the comment? c. Now consider a monetary contraction. Use the AA-DD-XX diagram to show its effects on income and the current account. d. Does this monetary policy response moderate the rise in income? What is the effect in the current account? Problem 2 True, False, Uncertain a. The financing of US stimulus plan should increase the US current account deficit. b. Under the flexible exchange rate regime, a permanent fiscal expansionary policy is more effective in boosting economic activity than a transitory one. c. A country needs to depreciate its real exchange rate to improve its current account. Problem 3 Krugman, Obstfeld and Melitz – Chapter 17 – problem 12....
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This note was uploaded on 10/17/2011 for the course ECON 182 taught by Professor Kasa during the Spring '08 term at Berkeley.

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