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11F_Mid2_Sol

# 11F_Mid2_Sol - ECONOMICS 204 PAGE NUMBER 1 UNIVERSITY OF...

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ECONOMICS 204 PAGE NUMBER 1 UNIVERSITY OF VICTORIA ECONOMICS 204 ANSWERS MIDTERM 2 FALL 2011 Section 1 (20 marks) Answer ALL 20 multiple-choice questions. 1. B 2. C 3. B 4. A 5. D 6. B 7. A 8. A 9. C 10. C 11. D 12. B 13. C 14. D 15. B 16. C 17. A 18. B 19. A 20. C Section 2 (20 marks) Answer BOTH questions. 1. Given: Output (Aggregate production function) Consumption Investment Net export Government policies National account identity ; Interest rate (a) Define in a diagram: trade deficit, i.e. NX < 0 (i) From national account identity we have (ii) Assumption of small open economy implies (iii) Solve the model: +0.5 Given: implies +0.5 +1 for clear labeling; +0.5 for indicating r * is below r c (a.k.a. the Autarky interest rate r A the equilibrium interest rate in a closed economy); +0.5 for indicating NX < 0 as the difference between saving and investment at r * . (b) Define in a diagram: equilibrium real exchange rate. (i) From (a) we have

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ECONOMICS 204 PAGE NUMBER 2 (ii) Net export is a function of real exchange rate (iii) Solve the model: +0.5 { Equivalently , the equilibrium ε is the exchange rate that equates NX with net capital outflow, S I .
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