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ProblemSet2

# ProblemSet2 - and tomorrow where HOME decides to consume in...

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Department of Economics Fall 2011 University of California, Berkeley Econ 182 1 Problem Set 2 Due on Thursday, September 15, in lecture. Please, write your full name , GSI , and section number on your problem set. Problem 1 Suppose we have a world with two countries, Home and Foreign. Answer the following questions: a. Draw two Metzler diagrams in which Foreign has higher autarky interest rate than Home. Show the equilibrium world interest rate and the corresponding current account balance for both countries. b. Suppose that, everything else the same, the government at Foreign decides to increase spending. What happens, if anything, to the Foreign Metzler diagram? What about the Home’s diagram? c. Do the Home and Foreign current accounts change? What about the world equilibrium interest rate? d. How would your answer to (c) and (d) change if Home and Foreign were closed economies? Problem 2 Consider a small open economy HOME and assume there are only two periods, today

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Unformatted text preview: and tomorrow, where HOME decides to consume in period 1, C 1 , and period 2, C 2 , for given incomes in period 1, Q 1 , and period 2, Q 2 . The world interest rate equals r. At this rate, assume HOME has its current account in balance a. Draw HOME’s initial intertemporal budget constraint and show its equilibrium consumption in the two periods. b. Assume there is an increase in the equilibrium world interest rate, such that the new r’>r. Show what happens to the intertemporal budget constraint of HOME. c. What happens to its current account? d. Is HOME better off with this rate increase? Problem 3 The chart below is extracted from Bloomberg and shows the TED spread in the last few months. a. What is the TED spread measuring? b. The chart shows that there was a substantial increase in this spread in August. What do you think is the reason behind the recent increase? Department of Economics Fall 2011 University of California, Berkeley Econ 182 2...
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ProblemSet2 - and tomorrow where HOME decides to consume in...

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