A TwoPeriod Model of the Current Account Obstfeld and Rogo, Chapter 1


 Rosaline May
 2 years ago
 Views:
Transcription
1 A TwoPeriod Model of the Current Account Obstfeld and Rogo, Chapter 1
2 1 Small Open Endowment Economy 1.1 Consumption Optimization problem maximize U i 1 = u c i 1 + u c i 2 < 1 subject to the budget constraint c i 1 + ci r = yi 1 + yi r :
3 Euler equation u 0 c i 1 = (1 + r) u 0 c i 2 When (1 + r) = 1; c i 1 = ci 2 = ci Use the budget constraint to solve for consumption c i = yi 1 (1 + r) + yi r
4 1.2 Current Account Increase in claims on ROW (rest of world) Equivalently, increase in net foreign assets CA t = B t+1 B t = Y t + r t B t C t GNP t = Y t + r t B t GDP t = Y t Current account in period 1: assume B 1 = 0 CA 1 = B 2 B 1 = Y 1 + r 1 B 1 C 1 = Y 1 C 1 = B 2
5 Current account in period 2: note B 3 = 0 since there are only two periods CA 2 = B 3 B 2 = Y 2 + r 2 B 2 C 2 = Y 2 + r 2 (Y 1 C 1 ) C 2 = B 2 Sum current accounts in periods 1 and 2 to yield intertemporal budget constraint CA 1 + CA 2 = (Y 1 C 1 ) (1 + r 2 ) + Y 2 C 2 = 0
6 1.3 Current Account as Intertemporal Trade Graph optimization problem with future consumption on verticle axis and current consumption on horizontal Slope of budget constraint is (1 + r) Autarky: country must consume endowment Trade can increase welfare since CA 1 = Y 1 C 1 ; particularly for a country with unequal current and future income A current account de cit today must be o set by a current account surplus in the future
7 Comparative advantage A country has a comparative advantage in the good it produces relatively cheaply in autarky In autarky, consumption equals production Solve for the autarkic interest rate, which yields goods market equilibrium (Y i = C i ) using the Euler equation u 0 (Y 2 ) u 0 (Y 1 ) = 1 = current consumption price of future consumption 1 + ra
8 If r < r A; domestic price of future consumption is relatively high, implying that the domestic country has a comparative advantage in current consumption Comparative advantage requires that the domestic country export the good for which its autarkic price is relatively low, that is export current consumption Domestic country will run a current account surplus in period 1 and a current account de cit in period 2
9 Consider an exogenous increase in Y 1 1 u 0 (Y 1 ) falls and 1+rA rises as current consumption becomes relatively cheaper compared to future consumtpion in autarky export even more current consumption, so period 1 current account surplus increases
10 Welfare and the world interest rate Assume that Y 2 > Y 1 for home and that r > r A Implies that the domestic price of future consumption is relatively low such that the domestic country has a comparative advantage in future consumption and a period1 current account de cit as import current consumption Let world interest rate rise such that countries become more similar and comparative advantage shrinks Use graph to show that the domestic country becomes worse o
11 E ect of temporary versus permanent output change on current account Assume (1 + r) = 1 If Y 1 = Y 2, then there is no current account imbalance If Y 1 > Y 2 ; current account surplus in period 1 and de cit in period 2
12 Government consumption Now, agents have only Y 1 G 1 and Y 2 G 2 available for consumption in periods 1 and 2 An increase in G 1 ; reduces output available for consumption in period 1 and creates a period1 current account de cit An increase in both G 1 and G 2 (permanent increase in G) has no current account e ect
13 2 Small Open Production Economy with Investment 2.1 Current Account with Investment Investment with no depreciation I t = K t+1 K t Change in total domestic wealth B t+1 + K t+1 (B t + K t ) = Y t + r t B t C t G t
14 Current account is increase in net foreign assets CA t = B t+1 B t = Y t + r t B t (C t + I t + G t ) = income  expenditure National Savings is de ned as S t = Y t + r t B t C t G t Current account is di erence between savings and investment CA t = S t I t
15 2.2 Intertemporal Budget Constraint Assume B 1 = B 3 = 0 Current account in period 1 B 2 = Y 1 (C 1 + I 1 + G 1 ) Current account in period 2 B 2 = Y 2 + rb 2 (C 2 + I 2 + G 2 ) B 2 = C 2 + I 2 + G 2 Y r
16 Equating the two expressions for B 2 yields the country s intertemporal budget constraint C 1 + I 1 + G 1 + C 2 + I 2 + G r = Y 1 + Y r
17 2.3 Optimal Consumption and Investment Production function Y t = F (K t ) Intertemporal budget constraint solved for C 2 C 2 = (1 + r) [F (K 1 ) C 1 G 1 I 1 ] + F (K 2 ) I 2 G 2 Substitute using K 2 = K 1 + I 1 K 2 = I 2 C 2 = (1 + r) [F (K 1 ) C 1 G 1 I 1 ]+F (K 1 + I 1 )+K 1 +I 1 G 2
18 Maximize present value of utility with respect to C 1 and I 1 u (C 1 )+u f(1 + r) [F (K 1 ) C 1 G 1 I 1 ] + F (K 1 + I 1 ) + K 1 + I 1 G 2 g First order condition with respect to C 1 is the standard Euler equation u 0 (C 1 ) = (1 + r) u 0 (C 2 ) Derivative with respect to I 1 u 0 (C 2 ) h (1 + r) + F 0 (K 2 ) + 1 i = 0 F 0 (K 2 ) = r Investment is independent of preferences toward consumption and savings
19 Can borrow at world interest rate to equate marginal product of capital with the interest rate
20 2.4 Production Possibility Fontier with Investment Two goods are future and current consumption PPF in autarchy C 2 = F (K 2 ) + K 2 = F (K 1 + F (K 1 ) C 1 ) + K 1 + F (K 1 ) C 1 Horizontal intercept sets C 2 = K 2 = 0 to maximize C 1 C 1 = K 1 + F (K 1 ) Vertical intercept sets C 1 = 0 to maximize C 2 C 2 = F (K 1 + F (K 1 )) + K 1 + F (K 1 )
21 Slope of PPF dc 2 dc 1 = F 0 (K 2 ) 1 < 0 Capital s diminishing marginal product makes the PPF concave d 2 C 2 dc 2 1 = F 00 (K 2 1 < 0 Consider point where C 1 is high and C 2 and K 2 are low F 0 (K 2 ) is high and falls as C 1 falls therefore, as C 1 falls, slope increases (becomes atter since slope is negative) with high C 1 and low C 2 ; diminishing marginal productivity implies that give up little C 1 to get a lot of C 2
22 as continue to substitute get less and less C 2 for each unit of C 1
23 2.5 Current Account as Intertemporal Trade Graph with social optimum in autarky Indi erence curve tangent to PPF at point A determines C 1 ; C 2; and I 1 Slope of indi erence curve and PPF at optimum is 1 + F 0 (K 2 ) = 1 + r A Let the world interest rate be lower r < r A ; such that future goods are relatively expensive abroad and cheap at home r > r A
24 Production occurs at point B where world relative price of future to current goods is tangent to PPF since r < r A, slope is atter Consumption occurs at point C where relative price of future to current goods is tangent to indi erence curve Domestic country has a comparative advantage in future goods, so it imports current goods and exports future goods Higher indi erence curve with trade illustrates gains from trade
25 Horizontal distances Between A and B is extra investment generated by opening trade Between A and C is extra consumption of C 1 Between B and C is period 1 current account de cit Government consumption shifts PPF inward
26 3 TwoCountry Endowment Economy World goods market equilibrium Y t + Y t = C t + C t World savings must equal zero S t = Y t C t = S t = C t Y t Assume savings is increasing in the interest rate and that r A < r A home country has a comparative advantage in current goods
27 with opening of trade, home interest rate rises, increasing savings and CA surplus while foreign interest rate falls, reducing foreign savings and foreign CA Welfare is positively related to the term of trade (TOT) T OT = price of exports price of imports Home country exports current goods whose price relative to future goods is 1 + r Therefore, home T OT = 1 + r Let Y 2 increase, reducing savings and increasing r A Equilibrium r increases to return world savings to zero
28 Domestic TOT increase and foreign TOT fall, increasing home welfare at the expense of foreign welfare Immiserizing Growth: An increase in current output (growth) increases savings and reduces the equilibrium interest rate. When home country exports current goods, the increase in current income can make it worse o Justify savings as an increasing function of the interest rate Assume CRRA utility u (C) = C1 1= 1 1=
29 Use Euler equation C 1 = [ (1 + r)] C2 and budget constraint to solve for C 1 C 2 = (Y 1 C 1 ) (1 + r) + Y 2
30 C 1 = Y 1 + Y 2 1+r 1 + (1 + r) 1 The e ect of an increase in interest on savings is the negative of its e ect on C 1 Substitution e ect [(1 + r) ] Higher interest makes current goods relatively more expensive causing agents to substitute out of current goods into future goods, raising savings Income e ect h (1 + r) 1i Given PVLR, higher interest allows more future consumption, reducing savings. If > 1; substitution effect dominates and higher interest reduces consumption and raises savings.
31 Wealth e ect: Reduces PVLR, reducing current and future consumption and raising savings
32 Alternative expression C 1 = [ (1 + r)] [(Y1 C 1 ) (1 + r) + Y 2 ] Totally di erentiate with respect to C 1 and r C2 1+r dc 1 dr = (Y 1 C 1 ) 1 + r + C 2 =C 1 Second term is negative due to substitution e ect First term is ambiguous TOT e ect and depends on whether agent is a borrower (negative e ect) or a lender (positive e ect) If lender (Y 1 C 1 > 0), comparative advantage in current goods, T OT = 1 + r; and increase in interest increases TOT and real income
33 4 TwoCountry Production Economy with Investment Savings dc 1 dr = Y 1 C 1 I r + C 2 =C 1 C2 1+r Investment where output is AF 0 (K) = r A F 0 (K ) = r Y = AF (K) Y = A F (K )
34 World equilibrium Y 1 + Y 1 = C 1 + C 1 + I 1 + I 1 S 1 + S 1 = I 1 + I 1 Metzler diagrams and shocks increase in home productivity in period 1 Increase in home productivity in period 2
35 Capital market restrictions A country with a current account de cit has a comparative advantage in future goods and its T OT = 1 1+r Can improve home welfare (at expense of foreign welfare) by increasing TOT (lowering r) Lower world interest rate if tax home consumption, raising home saving Both countries have the incentive to manipulate the TOT to their advantage, and the result can be reduced intertemporal trade Beggar thy neighbor policy
36 Oil prices and world interest rates in 1970 s, severe increase in world oil prices and redistribution of income toward oil exporters world savings increased and world interest rates fell in 1980 s world savings fell with very large US government budget de cits and larger OPEC spending world interest rates increased currently very high savings rates in emerging market countries Bernanke s savings glut low interest rates
Lecture 1: The intertemporal approach to the current account
Lecture 1: The intertemporal approach to the current account Open economy macroeconomics, Fall 2006 Ida Wolden Bache August 22, 2006 Intertemporal trade and the current account What determines when countries
More informationCurrent Accounts in Open Economies Obstfeld and Rogoff, Chapter 2
Current Accounts in Open Economies Obstfeld and Rogoff, Chapter 2 1 Consumption with many periods 1.1 Finite horizon of T Optimization problem maximize U t = u (c t ) + β (c t+1 ) + β 2 u (c t+2 ) +...
More informationLecture 1: current account  measurement and theory
Lecture 1: current account  measurement and theory What is international finance (as opposed to international trade)? International trade: microeconomic approach (many goods and factors). How cross country
More informationEconomics 165 Winter 2002 Problem Set #2
Economics 165 Winter 2002 Problem Set #2 Problem 1: Consider the monopolistic competition model. Say we are looking at sailboat producers. Each producer has fixed costs of 10 million and marginal costs
More informationIntertemporal approach to current account: small open economy
Intertemporal approach to current account: small open economy Ester Faia Johann Wolfgang Goethe Universität Frankfurt a.m. March 2009 ster Faia (Johann Wolfgang Goethe Universität Intertemporal Frankfurt
More informationA Model of the Current Account
A Model of the Current Account Costas Arkolakis teaching assistant: Yijia Lu Economics 407, Yale January 2011 Model Assumptions 2 periods. A small open economy Consumers: Representative consumer Period
More informationThe ShortRun Macro Model. The ShortRun Macro Model. The ShortRun Macro Model
The ShortRun Macro Model In the short run, spending depends on income, and income depends on spending. The ShortRun Macro Model ShortRun Macro Model A macroeconomic model that explains how changes in
More informationChapter 4. Specific Factors and Income Distribution
Chapter 4 Specific Factors and Income Distribution Introduction So far we learned that countries are overall better off under free trade. If trade is so good for the economy, why is there such opposition?
More informationPractice Problems on Current Account
Practice Problems on Current Account 1 List de categories of credit items and debit items that appear in a country s current account. What is the current account balance? What is the relationship between
More informationECO 352 Spring 2010 No. 7 Feb. 23 SECTORSPECIFIC CAPITAL (RICARDOVINER) MODEL
ECO 352 Spring 2010 No. 7 Feb. 23 SECTORSPECIFIC CAPITAL (RICARDOVINER) MODEL ASSUMPTIONS Two goods, two countries. Goods can be traded but not factors across countries. Capital specific to sectors,
More informationLecture 2 Dynamic Equilibrium Models : Finite Periods
Lecture 2 Dynamic Equilibrium Models : Finite Periods 1. Introduction In macroeconomics, we study the behavior of economywide aggregates e.g. GDP, savings, investment, employment and so on  and their
More informationPractice Problems on the Capital Market
Practice Problems on the Capital Market 1 Define marginal product of capital (i.e., MPK). How can the MPK be shown graphically? The marginal product of capital (MPK) is the output produced per unit of
More informationThe Current Account Balance: Part One
The Current Account Balance: Part One Barry W. Ickes Econ 434 Fall 2008 1. Introduction The current account balance is a measure of a country s transactions with the rest of the world. It includes all
More informationEconomics 181: International Trade Midterm Solutions
Prof. Harrison, Econ 181, Fall 05 1 Economics 181: International Trade Midterm Solutions 1 Short Answer 20 points) Please give a full answer. If you need to indicate whether the answer is true or false,
More informationPrinciples of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004
Principles of Macroeconomics Prof. Yamin Ahmad ECON 202 Fall 2004 Sample Final Exam Name Id # Part B Instructions: Please answer in the space provided and circle your answer on the question paper as well.
More informationdr Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw
Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw The small open economy The small open economy is an economy that is small enough compared to the
More informationAnswers to Text Questions and Problems in Chapter 11
Answers to Text Questions and Problems in Chapter 11 Answers to Review Questions 1. The aggregate demand curve relates aggregate demand (equal to shortrun equilibrium output) to inflation. As inflation
More informationDynamics of current account in a small open economy
Dynamics of current account in a small open economy Ester Faia, Johann Wolfgang Goethe Universität Frankfurt a.m. March 2009 ster Faia, (Johann Wolfgang Goethe Universität Dynamics Frankfurt of current
More informationThis paper is not to be removed from the Examination Halls
This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2065 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences, the Diplomas
More information13. If Y = AK 0.5 L 0.5 and A, K, and L are all 100, the marginal product of capital is: A) 50. B) 100. C) 200. D) 1,000.
Name: Date: 1. In the long run, the level of national income in an economy is determined by its: A) factors of production and production function. B) real and nominal interest rate. C) government budget
More informationECO364  International Trade
ECO364  International Trade Chapter 2  Ricardo Christian Dippel University of Toronto Summer 2009 Christian Dippel (University of Toronto) ECO364  International Trade Summer 2009 1 / 73 : The Ricardian
More informationThese are some practice questions for CHAPTER 23. Each question should have a single answer. But be careful. There may be errors in the answer key!
These are some practice questions for CHAPTER 23. Each question should have a single answer. But be careful. There may be errors in the answer key! 67. Public saving is equal to a. net tax revenues minus
More informationInternational Economic Relations
nternational conomic Relations Prof. Murphy Chapter 12 Krugman and Obstfeld 2. quation 2 can be written as CA = (S p ) + (T G). Higher U.S. barriers to imports may have little or no impact upon private
More informationChapter 5. Saving and Investment in the Open Economy. 2008 Pearson AddisonWesley. All rights reserved
Chapter 5 Saving and Investment in the Open Economy Chapter Outline Balance of Payments Accounting Goods Market Equilibrium in an Open Economy Saving and Investment in a Small Open Economy Saving and Investment
More informationProblem Set 2  Answers. Gains from Trade and the Ricardian Model
Page 1 of 11 Gains from Trade and the Ricardian Model 1. Use community indifference curves as your indicator of national welfare in order to evaluate the following claim: An improvement in the terms of
More informationEcon 101: Principles of Microeconomics Fall 2012
Problem 1: Use the following graph to answer the questions. a. From the graph, which good has the price change? Did the price go down or up? What is the fraction of the new price relative to the original
More informationECON 3560/5040 Week 2. 1. What Determines the Total Production of Goods and Services
ECON 3560/5040 Week 2 NATIONAL INCOME 1. What Determines the Total Production of Goods and Services  Factors of production: the inputs used to produce goods and services (1) Capital (K) (2) Labor (L)
More informationThe Circular Flow of Income and Expenditure
The Circular Flow of Income and Expenditure Imports HOUSEHOLDS Savings Taxation Govt Exp OTHER ECONOMIES GOVERNMENT FINANCIAL INSTITUTIONS Factor Incomes Taxation Govt Exp Consumer Exp Exports FIRMS Capital
More informationMICROECONOMICS AND POLICY ANALYSIS  U8213 Professor Rajeev H. Dehejia Class Notes  Spring 2001
MICROECONOMICS AND POLICY ANALYSIS  U8213 Professor Rajeev H. Dehejia Class Notes  Spring 2001 General Equilibrium and welfare with production Wednesday, January 24 th and Monday, January 29 th Reading:
More informationCHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY
CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How
More informationChapter 4 Specific Factors and Income Distribution
Chapter 4 Specific Factors and Income Distribution Chapter Organization Introduction The Specific Factors Model International Trade in the Specific Factors Model Income Distribution and the Gains from
More informationChapter 4 Specific Factors and Income Distribution
Chapter 4 Specific Factors and Income Distribution Chapter Organization Introduction The Specific Factors Model International Trade in the Specific Factors Model Income Distribution and the Gains from
More informationDynamics of Small Open Economies
Dynamics of Small Open Economies Lecture 2, ECON 4330 Tord Krogh January 22, 2013 Tord Krogh () ECON 4330 January 22, 2013 1 / 68 Last lecture The models we have looked at so far are characterized by:
More information. In this case the leakage effect of tax increases is mitigated because some of the reduction in disposable income would have otherwise been saved.
Chapter 4 Review Questions. Explain how an increase in government spending and an equal increase in lump sum taxes can generate an increase in equilibrium output. Under what conditions will a balanced
More informationPPF's of Germany and France
Economics 165 Winter 2 Problem Set #1 Problem 1: Let Germany and France have respective labor forces of 8 and 6. Suppose both countries produce wine and cares according to the following unit labor requirements:
More informationWeek 4 Tutorial Question Solutions (Ch2 & 3)
Chapter 2: Q1: Macroeconomics P.52 Numerical Problems #3 part (a) Q2: Macroeconomics P.52 Numerical Problems #5 Chapter 3: Q3: Macroeconomics P.101 Numerical Problems #5 Q4: Macroeconomics P102 Analytical
More informationUniversidad de Montevideo Macroeconomia II. The RamseyCassKoopmans Model
Universidad de Montevideo Macroeconomia II Danilo R. Trupkin Class Notes (very preliminar) The RamseyCassKoopmans Model 1 Introduction One shortcoming of the Solow model is that the saving rate is exogenous
More informationAnswers to Text Questions and Problems. Chapter 22. Answers to Review Questions
Answers to Text Questions and Problems Chapter 22 Answers to Review Questions 3. In general, producers of durable goods are affected most by recessions while producers of nondurables (like food) and services
More informationWhat you will learn: UNIT 3. Traditional Flow Model. Determinants of the Exchange Rate
What you will learn: UNIT 3 Determinants of the Exchange Rate (1) Theories of how inflation, economic growth and interest rates affect the exchange rate (2) How trade patterns affect the exchange rate
More informationStudy Questions for Chapter 9 (Answer Sheet)
DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 MWF 13:0013:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:0017:00 Study
More informationFinal. 1. (2 pts) What is the expected effect on the real demand for money of an increase in the nominal interest rate? How to explain this effect?
Name: Number: Nova School of Business and Economics Macroeconomics, 11031st Semester 20132014 Prof. André C. Silva TAs: João Vaz, Paulo Fagandini, and Pedro Freitas Final Maximum points: 20. Time: 2h.
More information2. Efficiency and Perfect Competition
General Equilibrium Theory 1 Overview 1. General Equilibrium Analysis I Partial Equilibrium Bias 2. Efficiency and Perfect Competition 3. General Equilibrium Analysis II The Efficiency if Competition The
More informationAnswer: C Learning Objective: Money supply Level of Learning: Knowledge Type: Word Problem Source: Unique
1.The aggregate demand curve shows the relationship between inflation and: A) the nominal interest rate. D) the exchange rate. B) the real interest rate. E) shortrun equilibrium output. C) the unemployment
More informationThe Real Business Cycle Model
The Real Business Cycle Model Ester Faia Goethe University Frankfurt Nov 2015 Ester Faia (Goethe University Frankfurt) RBC Nov 2015 1 / 27 Introduction The RBC model explains the comovements in the uctuations
More information2. With an MPS of.4, the MPC will be: A) 1.0 minus.4. B).4 minus 1.0. C) the reciprocal of the MPS. D).4. Answer: A
1. If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to: A) save is threefifths. B) consume is onehalf.
More informationANSWERS TO ENDOFCHAPTER QUESTIONS
ANSWERS TO ENDOFCHAPTER QUESTIONS 91 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investmentdemand curve, and (d) the investment schedule.
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Firms that survive in the long run are usually those that A) remain small. B) strive for the largest
More informationEconomics 181: International Trade Homework # 4 Solutions
Economics 181: International Trade Homework # 4 Solutions Ricardo Cavazos and Robert Santillano University of California, Berkeley Due: November 1, 006 1. The nation of Bermuda is small and assumed to
More informationProblem Set #5Key. Economics 305Intermediate Microeconomic Theory
Problem Set #5Key Sonoma State University Economics 305Intermediate Microeconomic Theory Dr Cuellar (1) Suppose that you are paying your for your own education and that your college tuition is $200 per
More information= C + I + G + NX ECON 302. Lecture 4: Aggregate Expenditures/Keynesian Model: Equilibrium in the Goods Market/Loanable Funds Market
Intermediate Macroeconomics Lecture 4: Introduction to the Goods Market Review of the Aggregate Expenditures model and the Keynesian Cross ECON 302 Professor Yamin Ahmad Components of Aggregate Demand
More informationChapter 12. Aggregate Expenditure and Output in the Short Run
Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)
More informationAnswers to Text Questions and Problems in Chapter 8
Answers to Text Questions and Problems in Chapter 8 Answers to Review Questions 1. The key assumption is that, in the short run, firms meet demand at preset prices. The fact that firms produce to meet
More informationName: Date: 2. The ISLM model takes as exogenous. A) the price level and national income B) the price level C) national income D) the interest rate
Name: Date: 1. John Maynard Keynes wrote that responsibility for low income and high unemployment in economic downturns should be placed on: A) low levels of capital. B) an untrained labor force. C) inadequate
More informationECON 305 Tutorial 7 (Week 9)
H. K. Chen (SFU) ECON 305 Tutorial 7 (Week 9) July 2,3, 2014 1 / 24 ECON 305 Tutorial 7 (Week 9) Questions for today: Ch.9 Problems 15, 7, 11, 12 MC113 Tutorial slides will be posted Thursday after 10:30am,
More informationThe level of price and inflation Real GDP: the values of goods and services measured using a constant set of prices
Chapter 2: Key Macroeconomics Variables ECON2 (Spring 20) 2 & 4.3.20 (Tutorial ) National income accounting Gross domestic product (GDP): The market value of all final goods and services produced within
More informationCHAPTER 9 Building the Aggregate Expenditures Model
CHAPTER 9 Building the Aggregate Expenditures Model Topic Question numbers 1. Consumption function/apc/mpc 142 2. Saving function/aps/mps 4356 3. Shifts in consumption and saving functions 5772 4 Graphs/tables:
More informationPreTest Chapter 8 ed17
PreTest Chapter 8 ed17 Multiple Choice Questions 1. The APC can be defined as the fraction of a: A. change in income that is not spent. B. change in income that is spent. C. specific level of total income
More informationAgenda. Saving and Investment in the Open Economy. Balance of Payments Accounts. Balance of Payments Accounting. Balance of Payments Accounting.
Agenda. Saving and Investment in the Open Economy Goods Market Equilibrium in an Open Economy. Saving and Investment in a Small Open Economy. Saving and Investment in a Large Open Economy. 71 72 Balance
More informationBalance of Payments. BoP Account Definitions. Tracking International Flows Of Goods and Services. Balance of Payments
Balance of Payments Tracking International Flows Of Goods and Services Balance of Payments The Balance of Payments (BoP) details the flow of all international transactions in and out of the country. It
More information1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases:
1) Explain why each of the following statements is true. Discuss the impact of monetary and fiscal policy in each of these special cases: a) If investment does not depend on the interest rate, the IS curve
More informationAgenda. Saving and Investment in the Open Economy, Part 2. Globalization and the U.S. economy. Globalization and the U.S. economy
Agenda Globalization and the U.S. Economy Saving and Investment in the Open Economy, Part 2 Saving and Investment in Large Open Economies (LOE) The U.S. Current Account Deficit Fiscal Policy and the Current
More informationProblem Set #3 Answer Key
Problem Set #3 Answer Key Economics 305: Macroeconomic Theory Spring 2007 1 Chapter 4, Problem #2 a) To specify an indifference curve, we hold utility constant at ū. Next, rearrange in the form: C = ū
More informationEC2105, Professor Laury EXAM 2, FORM A (3/13/02)
EC2105, Professor Laury EXAM 2, FORM A (3/13/02) Print Your Name: ID Number: Multiple Choice (32 questions, 2.5 points each; 80 points total). Clearly indicate (by circling) the ONE BEST response to each
More information1. Various shocks on a small open economy
Problem Set 3 Econ 122a: Fall 2013 Prof. Nordhaus and Staff Due: In class, Wednesday, September 25 Problem Set 3 Solutions Sebastian is responsible for this answer sheet. If you have any questions about
More informationInternational Macroeconommics
International Macroeconommics Chapter 7. The Open Economy ISLM Model Department of Economics, UCDavis Outline 1 Building the ISLMFX Model 2 Monetary Policy Fiscal Policy Outline Building the ISLMFX
More informationHomework #5: Answers. b. How can land rents as well as total wages be shown in such a diagram?
Homework #5: Answers Text questions, hapter 6, problems 14. Note that in all of these questions, the convention in the text, whereby production of food uses land and labor, and clothing uses capital and
More informationOutline of model. Factors of production 1/23/2013. The production function: Y = F(K,L) ECON 3010 Intermediate Macroeconomics
ECON 3010 Intermediate Macroeconomics Chapter 3 National Income: Where It Comes From and Where It Goes Outline of model A closed economy, marketclearing model Supply side factors of production determination
More informationConsumers face constraints on their choices because they have limited incomes.
Consumer Choice: the Demand Side of the Market Consumers face constraints on their choices because they have limited incomes. Wealthy and poor individuals have limited budgets relative to their desires.
More informationLong Run Economic Growth Agenda. Longrun Economic Growth. Longrun Growth Model. Longrun Economic Growth. Determinants of Longrun Growth
Long Run Economic Growth Agenda Longrun economic growth. Determinants of longrun growth. Production functions. Longrun Economic Growth Output is measured by real GDP per capita. This measures our (material)
More informationClassical International Trade Theory
Classical International Trade Theory Ricardian Comparative Advantage Explains why economists think trade is good HeckscherOhlin Theorem Explains why countries produce and export the goods they do StoplerSamuelson
More informationOptimal Investment. Government policy is typically targeted heavily on investment; most tax codes favor it.
Douglas Hibbs L, L3: AAU Macro Theory 009/4 Optimal Investment Why Care About Investment? Investment drives capital formation, and the stock of capital is a key determinant of output and consequently
More informationMidterm Exam I: Answer Sheet
Econ 434 Professor Ickes Fall 2001 Midterm Exam I: Answer Sheet 1. (20%) Suppose that I have a short position in yen and I wish to hedge my currency risk over the next three months. Carefully explain how
More informationChapter 32 A Macroeconomic Theory of the Open Economy
Chapter 32 A Macroeconomic Theory of the Open Economy TRUE/FALSE 1. Over the past two decades, the United States has persistently exported more goods and services than it has imported. ANS: F DIF: 1 REF:
More informationIntroduction. Agents have preferences over the two goods which are determined by a utility function. Speci cally, type 1 agents utility is given by
Introduction General equilibrium analysis looks at how multiple markets come into equilibrium simultaneously. With many markets, equilibrium analysis must take explicit account of the fact that changes
More informationNotes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation. Jon Bakija
Notes on indifference curve analysis of the choice between leisure and labor, and the deadweight loss of taxation Jon Bakija This example shows how to use a budget constraint and indifference curve diagram
More informationTHE U.S. CURRENT ACCOUNT: THE IMPACT OF HOUSEHOLD WEALTH
THE U.S. CURRENT ACCOUNT: THE IMPACT OF HOUSEHOLD WEALTH Grant Keener, Sam Houston State University M.H. Tuttle, Sam Houston State University 21 ABSTRACT Household wealth is shown to have a substantial
More information8. Simultaneous Equilibrium in the Commodity and Money Markets
Lecture 81 8. Simultaneous Equilibrium in the Commodity and Money Markets We now combine the IS (commoditymarket equilibrium) and LM (moneymarket equilibrium) schedules to establish a general equilibrium
More informationUniversity of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi
University of Lethbridge Department of Economics ECON 1012 Introduction to Macroeconomics Instructor: Michael G. Lanyi CH 27 Expenditure Multipliers 1) Disposable income is A) aggregate income minus transfer
More informationAGGREGATE DEMAND AND AGGREGATE SUPPLY The Influence of Monetary and Fiscal Policy on Aggregate Demand
AGGREGATE DEMAND AND AGGREGATE SUPPLY The Influence of Monetary and Fiscal Policy on Aggregate Demand Suppose that the economy is undergoing a recession because of a fall in aggregate demand. a. Using
More information2.If actual investment is greater than planned investment, inventories increase more than planned. TRUE.
Macro final exam study guide True/False questions  Solutions Case, Fair, Oster Chapter 8 Aggregate Expenditure and Equilibrium Output 1.Firms react to unplanned inventory investment by reducing output.
More informationIntermediate Microeconomics (22014)
Intermediate Microeconomics (22014) I. Consumer Instructor: Marc TeignierBaqué First Semester, 2011 Outline Part I. Consumer 1. umer 1.1 Budget Constraints 1.2 Preferences 1.3 Utility Function 1.4 1.5
More informationLearning on the quick and cheap: Gains from trade through imported expertise
Learning on the quick and cheap: Gains from trade through imported expertise James R. Markusen University of Colorado, Boulder IIIS, Trinity College Dublin Thomas F. Rutherford University of Colorado,
More informationMicroeconomic FRQ s. Scoring guidelines and answers
Microeconomic FRQ s 2005 1. Bestmilk, a typical profitmaximizing dairy firm, is operating in a constantcost, perfectly competitive industry that is in longrun equilibrium. a. Draw correctlylabeled
More informationCAPM, Arbitrage, and Linear Factor Models
CAPM, Arbitrage, and Linear Factor Models CAPM, Arbitrage, Linear Factor Models 1/ 41 Introduction We now assume all investors actually choose meanvariance e cient portfolios. By equating these investors
More informationIntroduction to Macroeconomics TOPIC 2: The Goods Market
TOPIC 2: The Goods Market Annaïg Morin CBS  Department of Economics August 2013 Goods market Road map: 1. Demand for goods 1.1. Components 1.1.1. Consumption 1.1.2. Investment 1.1.3. Government spending
More informationa) Aggregate Demand (AD) and Aggregate Supply (AS) analysis
a) Aggregate Demand (AD) and Aggregate Supply (AS) analysis Determinants of AD: Aggregate demand is the total demand in the economy. It measures spending on goods and services by consumers, firms, the
More informationInsurance. Michael Peters. December 27, 2013
Insurance Michael Peters December 27, 2013 1 Introduction In this chapter, we study a very simple model of insurance using the ideas and concepts developed in the chapter on risk aversion. You may recall
More information0 100 200 300 Real income (Y)
Lecture 111 6.1 The open economy, the multiplier, and the IS curve Assume that the economy is either closed (no foreign trade) or open. Assume that the exchange rates are either fixed or flexible. Assume
More informationTable of Contents MICRO ECONOMICS
economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...
More informationAnswers to Other Textbook Problems. Chapter 13
Answers to Other Textbook Problems Chapter 13 1. At an exchange rate of $1.50 per euro, the price of a bratwurst in terms of hot dogs is 1.875 (7.5/4) hot dogs per bratwurst. After a dollar appreciation
More informationNoah Williams Economics 312. University of Wisconsin Spring 2013. Midterm Examination Solutions
Noah Williams Economics 31 Department of Economics Macroeconomics University of Wisconsin Spring 013 Midterm Examination Solutions Instructions: This is a 75 minute examination worth 100 total points.
More informationCONSUMER PREFERENCES THE THEORY OF THE CONSUMER
CONSUMER PREFERENCES The underlying foundation of demand, therefore, is a model of how consumers behave. The individual consumer has a set of preferences and values whose determination are outside the
More informationKey elements of Monetary Policy
Key elements of Monetary Policy Part II Economic Policy Course for Civil Society June 2004 World Bank Institute Structure of the Presentation Introduction Current account Balance of Payments Debt Current
More informationModule 2 Lecture 5 Topics
Module 2 Lecture 5 Topics 2.13 Recap of Relevant Concepts 2.13.1 Social Welfare 2.13.2 Demand Curves 2.14 Elasticity of Demand 2.14.1 Perfectly Inelastic 2.14.2 Perfectly Elastic 2.15 Production & Cost
More informationChapter 3 Consumer Behavior
Chapter 3 Consumer Behavior Read Pindyck and Rubinfeld (2013), Chapter 3 Microeconomics, 8 h Edition by R.S. Pindyck and D.L. Rubinfeld Adapted by Chairat Aemkulwat for Econ I: 2900111 1/29/2015 CHAPTER
More informationAn increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.
1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.
More informationCurrent Accounts and Demand Transmission in a TwoCountry World Econ 182, 11/17/99 Marc Muendler
Current Accounts and Demand Transmission in a TwoCountry World Econ 182, 11/17/99 Marc Muendler The first thought in international economics usually is to consider a small open economy. When doing macroeconomics
More informationThis paper is not to be removed from the Examination Halls
~~EC2065 ZA d0 This paper is not to be removed from the Examination Halls UNIVERSITY OF LONDON EC2065 ZA BSc degrees and Diplomas for Graduates in Economics, Management, Finance and the Social Sciences,
More informationAP Macroeconomics: Vocabulary. 1. Aggregate Spending (GDP): The sum of all spending from four sectors of the economy.
AP Macroeconomics: Vocabulary 1. Aggregate Spending (GDP): The sum of all spending from four sectors of the economy. GDP = C+I+G+Xn 2. Aggregate Income (AI) :The sum of all income earned by suppliers of
More informationEcon 116 MidTerm Exam
Econ 116 MidTerm Exam Part 1 1. True. Large holdings of excess capital and labor are indeed bad news for future investment and employment demand. This is because if firms increase their output, they will
More information