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    International Monetary Theory and Policy

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    happystone
    This document is an economics homework assignment that contains 3 questions. It describes a 2-period small open economy model with households that receive endowments of 10 goods in each period and start with an initial debt of -5. The domestic interest rate is 20% and world interest rate is 10%. The questions ask the student to: 1) Calculate consumption, trade balance, and current account for each period. 2) Examine the effect of an expected increase in the period 2 endowment. 3) Analyze the impact of forgiving the initial external debt. The student is supposed to compare the answers to question 1 and provide explanations.

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    International Monetary Theory and Policy

    Uploaded by

    happystone
    59 views1 page
    This document is an economics homework assignment that contains 3 questions. It describes a 2-period small open economy model with households that receive endowments of 10 goods in each period and start with an initial debt of -5. The domestic interest rate is 20% and world interest rate is 10%. The questions ask the student to: 1) Calculate consumption, trade balance, and current account for each period. 2) Examine the effect of an expected increase in the period 2 endowment. 3) Analyze the impact of forgiving the initial external debt. The student is supposed to compare the answers to question 1 and provide explanations.

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    This document is an economics homework assignment that contains 3 questions. It describes a 2-period small open economy model with households that receive endowments of 10 goods in each period and start with an initial debt of -5. The domestic interest rate is 20% and world interest rate is 10%. The questions ask the student to: 1) Calculate consumption, trade balance, and current account for each period. 2) Examine the effect of an expected increase in the period 2 endowment. 3) Analyze the impact of forgiving the initial external debt. The student is supposed to compare the answers to question 1 and provide explanations.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    59 views1 page

    International Monetary Theory and Policy

    Uploaded by

    happystone
    This document is an economics homework assignment that contains 3 questions. It describes a 2-period small open economy model with households that receive endowments of 10 goods in each period and start with an initial debt of -5. The domestic interest rate is 20% and world interest rate is 10%. The questions ask the student to: 1) Calculate consumption, trade balance, and current account for each period. 2) Examine the effect of an expected increase in the period 2 endowment. 3) Analyze the impact of forgiving the initial external debt. The student is supposed to compare the answers to question 1 and provide explanations.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 1

    Department of Economics Instructor: Martn Uribe

    Columbia University Spring 2013


    Economics W4505
    International Monetary Theory and Policy
    Homework 3
    Due February 13 in class
    Consider a two-period small open endowment economy populated by a large number of households with
    preferences given by the lifetime utility function
    C
    1
    10
    1
    C
    1
    11
    2
    ,
    where C
    1
    and C
    2
    denote, respectively, consumption in periods 1 and 2. Suppose that households receive
    exogenous endowments of goods given by Q
    1
    = Q
    2
    = 10 in periods 1 and 2, respectively. Every household
    enters period 1 with a negative asset position inherited from the past, B

    0
    = 5. The interest rate on these
    liabilities, denoted r
    0
    , is 20 percent. Finally, suppose that the country enjoys free capital mobility and that
    the world interest rate on assets held between periods 1 and 2, denoted r

    , is 10 percent.
    1. Compute the equilibrium levels of consumption, the trade balance, and the current account in periods
    1 and 2.
    2. Assume now that the endowment in period 2 is expected to increase from 10 to 15. Calculate the eect
    of this anticipated output increase on consumption, the trade balance, and the current account in both
    periods. Compare your answer to that for item 1 and provide intuition.
    3. Finally, suppose now that foreign lenders decide to forgive all of the countrys initial external debt.
    How does this decision aect the countrys levels of consumption, trade balance, and current account
    in periods 1 and 2. (For this question, assume that Q
    1
    = Q
    2
    = 10.) Compare your answer to that
    given for item 1 and explain.
    1

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