14.02 Principles of Macroeconomics Problem Set 5 Fall 2005

Transcription

1 40 Principls of Macroconomics Problm S 5 Fall 005 Posd: Wdnsday, Novmbr 6, 005 Du: Wdnsday, Novmbr 3, 005 Plas wri your nam AND your TA s nam on your problm s Thanks! Exrcis I Tru/Fals? Explain Dpnding on xpcaions, a conracionary fiscal policy can rduc h budg dfici wihou a dcras of h oupu lvl Tru If h siuaion is such ha h announcmn of a conracionary fiscal policy oday maks popl improv hir xpcaions in h fuur subsanially (highr Y fuur, lowr r fuur, i could b ha h IS curv shifs o h righ insad of o h lf Tradabl goods prics ar a br masur of h dgr of opnnss of an conomy han rad volum Tru Th volum of rad aks ino accoun h siz of xpors and impors Howvr, i dos no fully ak ino accoun h chang in bhavior of h domsic mark (producrs and consumrs implid by a highr dgr of opnnss of h conomy Th chang in prics of radabl goods (n of ransporaion coss is a br indicaor For xampl, domsic producrs may b forcd o sll a a lowr pric onc hy ar challngd by forignr compiors I could b ha domsic consumrs sill buy producs from domsic producrs, bu a a much lowr pric This ffc is no capurd by a chang in h volum of rad 3 In h mdium run quilibrium, h currn accoun has o b balancd Fals Evn if running a big rad dfici can b problmaic, h naural lvl of oupu dos no prvn i from happning Y n is drmind in h labor mark and is indpndn of rad budg considraions Th dgr of opnnss, howvr, could affc Y n hrough svral ohr channls: changing h markup, h labor mark srucur (h variabl z, or mayb vn h siz of h labor forc

2 4 If h uncovrd inrs pariy dos no hold, i surly mans ha hr is an arbirag opporuniy Fals Th uncovrd inrs pariy dos no ak in accoun svral facors ha can jusify diffrncs in rurns: risk and ransacion coss, for xampl 5 Th highr h dgr of opnnss of an conomy, h lss of an ffc a domsic xpansionary fiscal policy has on h oupu lvl Tru In an opn conomy h Kynsian muliplir is smallr Par of h ffc of an xpansionary fiscal policy is absorbd by an incras in impors Exrcis II Exchang Ras and h Inrs Pariy Condiion Assum ha h uncovrd inrs pariy holds Europan bonds mauriy i -y 00 -y 00 3-y y y 005 Us-bonds mauriy i -y y y y y 0045 Knowing ha h currn xchang ra bwn dollar and uro E is 085 (uros pr dollar, calcula h mark xpcaion abou h nominal xchang ra for h nx 5 yars ( E+, E +, E+ 3, E+ 4, E + 5 HINT: You may wan o us a spradsh o do h calculaions Th uncovrd inrs pariy is E ( ( + i = + i E+ From i w g E In ordr o calcula h xpcd nominal xchang ra from + on, w can proprly adap h uncovrd inrs pariy, rmmbring ha i is a no arbirag condiion Rmmbr ha h yild o mauriy on an n-yar bond or, quivalnly, h n- yar inrs ra, is dfind as ha consan annual inrs ra ha maks h bond pric oday qual o h prsn valu of fuur paymns on h bond Now compar, for xampl, h rurns on a Europan bond and h on on a USbond, boh bonds wih mauriy of yars

3 Th xpcd prsn valu of h rurn on h Amrican bond is i i i + Th xpcd prsn valu of h rurn on an Europan bond purchasd oday is i E i i + E+ No ha h ral xchang ra aks ino accoun h momn in which uros ar bough in ordr o purchas h Europan bond (oday and h momn in which h rurn in uros on h bond, onc maurd, is convrd back o dollars Th no arbirag condiion impos ha h wo xpcd rurns hav o b qual Givn ha h discoun facor is h sam for boh xpcd prsn valus, w can simplify h xprssion E i = i E+ Procding in his way for h rmaining xpcd xchang w g E E E E E You may say ha assuming ha h bonds ar bough oday is an ad hoc assumpion Insad h no arbirag condiion should hold also for rad sragis ha rquir buying h ass in h fuur Go back o h xampl Assum ha w wan o buy h Europan bond nx yar In his cas h no arbirag condiion is E+ i, + = i, + E+ whr i + is h nx yar s xpcd -yar nominal inrs ra Rmmbr from h srucur of h yild curv ha ( = i ( + i This is anohr quivaln way o pin down i + E+, E + 3, E + 4, E+ 5 + Assum ha h pric indxs ar P = 0 99 for Europ and P = 3 for h US Calcula h currn bilaral ral xchang ra bwn h US and Europ, EP Th ral xchang ra is dfind as = P = 33 No ha vn hough h nominal xchang ra is low, Amrican goods ar valud mor han : vrsus Europan goods sinc h pric lvl in h US is highr

4 3 Suppos ha in h nx 5 yars inflaion ras ar xpcd o b fixd a π = % in Europ and a π = 3% in h US Calcula h mark xpcaions for h ral xchang ra for h nx 5 yars P P Rmmbr ha = + π + P Givn ha π + i = 3% for i=,,3,4,5; w can calcula h fuur xpcd USpric lvls P 3 P P P P P Similarly for Europ P 099 P P P P P Combining all h daa abou xpcd pric lvls and xpcd nominal xchang ras, w can compu h xpcd ral xchang ra psilon psilon+ 677 psilon+ 643 psilon+3 0 psilon psilon Kping vryhing ls consan, how dos you answr chang if h mark xpcs π = 3% and π = % insad? Is h assumpion o kp vryhing ls consan plausibl? Explain Kping vryhing ls consan w g psilon psilon psilon psilon psilon psilon Th assumpion of kping vryhing ls consan is no plausibl A chang in h xpcd inflaion ras changs h srucur of h yild curv This implis a chang in h xpcd nominal xchang ra Taking in accoun of his fac can lad o a diffrn parn for h xpcd ral xchang ra

5 Exrcis III Opn Economy IS-LM Considr h following opn conomy: C = ( Y T I = Y 40r = 0Y + 4 X = 00Y 4 T = 50 G = 50 Y = 5000 (GDP of h rs of h world s M = 00 M d = PY 3600i Suppos ha P = P = and ha hr is no inflaion π = π = 0 Assum h conomy commis o having a rad balanc (n xpors qual o zro (TB=0 Calcula h quilibrium (Y, r, IS rlaion: Y = C + I + G + NX whr NX = X Trad Balanc qual o zro: NX = 0 Y = Y Y 40r + Y = 04Y r Y = r s d LM rlaion: M = M Givn i = r + π, and π = 0, i = r 00 = Y 3600r Y = r IS-LM quilibrium r = r 4000 r = 00 i = r = 005 Y = 380 From h TB=0 condiion w g ( 0Y Y 4 = Plugging in h valus for Y and Y 6 = 48 = 9 ( 50

6 If r = 0 0 and h uncovrd inrs pariy holds, wha is h xpcd chang in h ral xchang ra for h nx priod? EP No ha = = E P a any priod (, givn h assumpions P = P = andπ = π = 0 W nod bfor hai = r (bcaus of h sam assumpions E Th uncovrd inrs pariy sas ( ( + i = + i E+ Givn our assumpions i bcoms ( ( + r = + r + r Thus + = + r + = 5 ( 3 Kp TB=0 and imagin ha G incrass by 48 Calcula h nw quilibrium How dos your answr o par chang? ( Y Y Y = r + Y = 04Y r Y = r IS-LM quilibrium r = r 4000 r = 80 r = 007 Y = 45 From h TB=0 condiion w g 00 0Y = 48 = 4 + = 09 4 Assum G=50 as in h bginning of his qusion Imagin h conomy commis o having a fixd ral xchang ra = + = and allows h rad balanc o vary Calcula h quilibrium From h uncovrd inrs pariy w g r = r = 0 0 From h LM rlaion w g Y = r Y = 7 From h IS rlaion w g ( ( 0Y + 4 Y = Y Y 40r Y 4

7 48 = 448 = 30 X = 76 = 996 TB = X = 7 5 Imagin ha G incrass by 48 Assum ha h Cnral Bank dos no accommoda his policy, (i hy do nohing Calcula h nw quilibrium How dos h TB chang? Commn (HINT: Th govrnmn sill wans o kp = + =, bu hy could chang h valu of Sill r = r = 0 0 and Y = 7 hold Y = = 98 = 40 X = 36 = 36 TB = X ( Y 50 = Y 40r Y 4 ( 0Y + 4 Th Trad Dfici incrass by 48 No ha h ral xchang ra is changd forcing h govrnmn o dvalua: a fiscal policy as h on w dscribd and h commimn o kp a fixd xchang ra ar inconsisn 6 Assum G=50 again How dos a dcras in Y by 400 affc h quilibriums you calculad in par and par 3, rspcivly? Commn In h TB=0 policy rul scnario, a ngaiv shock o Y dos no chang h quilibrium Y=380 and r=005 Th ral xchang ra drops from 9 o 09 Th chang in h ral xchang ra nuralizs h ffcs of h forign incom shocks Th govrnmn can hus mainain i s commimn o TB=0 by ling h xchang ra vary frly Also in h = + = policy rul scnario, a dcras in Y dos no chang nihr quilibrium Y=7 nor quilibrium r=00, bu h ral xchang ra gos undr prssur If nohing changs, has o b dvaluad from 30 o 93 In his cas an xpansionary fiscal policy G = + 48 hlps h govrnmn o kp Economic policy has o b usd in ordr o nuraliz h ffcs of a forign incom shock and kp h commimn