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    Macro Finals: Key Section A: 1 of 2 Pages

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    Ankur Goel
    (1) If output exceeds domestic spending, then savings exceeds investment and there is a net capital outflow from the country. (2) In a fixed exchange rate regime, if the home country's inflation rate exceeds the foreign country's rate, then the home country's real exchange rate will rise rather than fall as the nominal exchange rate remains constant. (3) In the Solow growth model, an increase in a country's population growth rate will cause the steady-state level of per capita income to fall.

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    Macro Finals: Key Section A: 1 of 2 Pages

    Uploaded by

    Ankur Goel
    43 views3 pages
    (1) If output exceeds domestic spending, then savings exceeds investment and there is a net capital outflow from the country. (2) In a fixed exchange rate regime, if the home country's inflation rate exceeds the foreign country's rate, then the home country's real exchange rate will rise rather than fall as the nominal exchange rate remains constant. (3) In the Solow growth model, an increase in a country's population growth rate will cause the steady-state level of per capita income to fall.

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    (1) If output exceeds domestic spending, then savings exceeds investment and there is a net capital outflow from the country. (2) In a fixed exchange rate regime, if the home country's inflation rate exceeds the foreign country's rate, then the home country's real exchange rate will rise rather than fall as the nominal exchange rate remains constant. (3) In the Solow growth model, an increase in a country's population growth rate will cause the steady-state level of per capita income to fall.

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    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    43 views3 pages

    Macro Finals: Key Section A: 1 of 2 Pages

    Uploaded by

    Ankur Goel
    (1) If output exceeds domestic spending, then savings exceeds investment and there is a net capital outflow from the country. (2) In a fixed exchange rate regime, if the home country's inflation rate exceeds the foreign country's rate, then the home country's real exchange rate will rise rather than fall as the nominal exchange rate remains constant. (3) In the Solow growth model, an increase in a country's population growth rate will cause the steady-state level of per capita income to fall.

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    of 3

    Macro finals : Key Section A State whether each of the following statements is TRUE or FALSE.

    Give a brief explanation or draw a clearly labelled diagram to justify your answer. 1. (a) If output > domestic spending, S > I and Net Capital Outflow NCO > 0. TRUE Definitions: S Y C G (National Saving). This implies Y C + S + G (i) E C + I + G (Domestic Spending on goods and services produced at home or abroad) ______________________________________________________________________________ (b) In a fixed exchange regime, if the rate of inflation in the home country (H) exceeds that in foreign country (F) then Hs real exchange rate falls, keeping the nominal exchange rate constant. FALSE Definition: = eP/P* If domestic rate of inflation is higher, then (P/P*) will rise. Since e is constant it follows that will rise not fall. ______________________________________________________________________________ (c) In the Solow model steady state per capita income will fall if population growth increases. TRUE On the steady state sf(k) = (n+d+g)k where stands for An increase in n will require a rise in [f(k)/k] to maintain steady state equilibrium. Now [f(k)/k] is inversely related to k. Hence when n rises k falls. Now y = f(k) where y is per capita income. Since f(k) is increasing in k, a fall in k reduces y. Hence the assertion is true.

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    (d) NX > NCO implies that the supply of the home currency > demand for it in the market for foreign exchange. FALSE NX corresponds to a demand for home currency in exchange for foreign currency earned through exports (net of payment to importers). NCO corresponds to demand for foreign currency to purchase foreign assets (net of supply of foreign currency by foreigners wanting to purchase assets of the home country). Therefore, NX > NCO demand for home currency > supply of home currency. The assertion is false. _____________________________________________________________________________ (e) A country is operating at full employment. A decline in investment demand will cause the real exchange rate to fall. TRUE The equilibrium condition for an open economy is S(Y) I(r) = NX(). For a small country with perfect capital mobility, r = r*, given. Suppose that I falls, given r. Since Y = Y f is fixed, so is S, hence the fall in I will raise the l.h.s. So equilibrium NX is going to be higher. Since NX varies inversely with , it follows that must be lower. (5x2=10) Section B 2. Consider the Mundell-Fleming model for a small open economy with perfect capital mobility and with a flexible (floating) exchange rate system. (i) Draw a properly labelled diagram to depict the equilibrium Y and e. Mark the equilibrium exchange rate e1 (ii) The policy makers in this economy decide to move to a fixed exchange rate system. They choose an exchange rate e2<e1 Draw the diagram you drew in answer to part (i) above. In this diagram, now show how the new equilibrium will look like. (iii) Consider the following data for this economy: C=0.8(Y T); I=100/r; G=T=0; NX=75 e; (M/P)d = Y; M=1000; P=1 and r*=0.1 Calculate the equilibrium values of Y, r, e and NX (5+5+4)
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    3. (a) In Irving Fishers inter-temporal model of consumption, explain whether the following assertions are correct: (i) Current consumption depends on how incomes are distributed over time, i.e. on the timing of incomes. (ii) Current consumption depends on the present value of the income stream, given the rate of interest. (b) In the same model, a consumer is observed to consume 1000 in period 1 and 1000 in period 2. She has no income in period 1 and 2100 income in period 2. Calculate the rate of interest. (2+2+2 = 6) Section C 4. The home country (H) requires 4 units of labour to produce one unit of Wheat (W) and 8 units of labour to produce one unit of Jeans (J). Corresponding figures for labour requirements in the foreign country (F) are 3 and 3 respectively. (a) (b) Identify the comparative advantage of each country. Justify your answer. Suppose total labour population of F is 300. Apply the principle of comparative advantage to determine the labour allocation in F after trade with H is opened up. What are the post-trade levels of world production of W and J if the total labour population in H is 100 and that in F is 300? (4+2+4 = 10) 5. Consider the Solow model of economic growth with the production function Y=3K1/3L2/3 (i) (ii) Convert the production function to a per-worker form. Consider two economies with the same production function, same access to technology, same quality of capital and labour and same saving rate s. Suppose one economy has higher per-worker output in the steady state compared to the other economy. What could be a possible explanation for this difference? If, in an economy, n=0.02 and =0, calculate the Golden Rule value of capital per worker. ` (2+4+4=10)

    (c)

    (iii)

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