Solve each of the problems according to the question
Microsoft Word - Exam2_160B_S21.doc TAKE HOME EXAMS COVER PAGE SPRING 2021 * Write your answers directly on this exam (on printed copy or edit in PDF) * Submit completed exam by uploading to Canvas>Gradescope (scanned or edited PDF) * NOTE: Submit all pages when you upload, including cover pages, and any you left blank, because Gradscope expects the submission pages to match the blank exam BEFORE STARTING THE EXAM YOU MUST READ AND SIGN THIS MANDATORY STUDENT STATEMENT As a student at UC Davis, I hold myself to a high standard of integrity, and by signing/accepting the statement below I reaffirm my pledge to act ethically by honoring the UC Davis Code of Academic Conduct. I will also encourage other students to avoid academic misconduct. I acknowledge that the work I submit is my individual effort. I did not consult with or receive any help from any person or other source. I also did not provide help to others. I may work with others only if the instructor gave specific instructions, and only to the extent allowed by the instructor. I understand that suspected misconduct on this assignment/exam will be reported to the Office of Student Support and Judicial Affairs and, if established, will result in disciplinary sanctions up through Dismissal from the University and a grade penalty up to a grade of “F” for the course. I understand that if I fail to acknowledge or sign this statement, an instructor may not grade this work and may assign a grade of “0” of “F”. Signature: ___________________________________________________________ 1 UC Davis ECN 160B: International Macroeconomics Spring 2021 Midterm Exam 2 Start: May 17, 2021, 12 noon, California time End: May 19, 2021, 12 noon, California time Professor Alan M. Taylor Please: Enter your name and ID# below DO NOT OPEN the exam until you are given instructions to do so This exam contains 8 pages. There are 4 questions worth 10 points each. This is a 1 hour and 20 minute exam. Spring 2021: FOR THIS REMOTE EXAM: You have 48 hours to submit and the exam is open-book. You must show your work on all questions to receive credit. The UC Davis Code of Academic Conduct applies
Name: ______________________________________________________________ ID #: ______________________________________________________________ Question 1 (10 points) Question 2 (10 points) Question 3 (10 points) Question 4 (10 points) Total (40 points) 2 1.MiscellaneousShortQuestions[1pointeach] a. Thesumofconsumption,investment,governmentconsumption,andthe tradebalanceiscalled _______________________________________________________________________________________ b. Thecurrentaccountisequaltothesumofthreebalanceofpaymentsitems ________________________plus________________________plus________________________ c. Thisyearacountry’stradebalanceis+$186billion,itsnetfactorincome fromabroadis+$27billion,itsnetunilateraltransfersare–$8billion,andits capitalaccountis–$3billion.Whatisthecountry’sfinancialaccount?Ifthe countryhasnetcapitalgains(valuationeffects)onitsexternalwealthof +$42billion,whatisthechangeinitslevelexternalwealthW? FinancialAccount FA=_______________________________________ Changeinexternalwealth =_______________________________________ d. Acountryhaszeroexternalwealthinitially.Theworldinterestrateisr* andthecountry’stradebalanceisTBninperiodn=0,1,2,3,….Writedown anexpressionforthecountry’slong-runbudgetconstraint(LRBC): _______________________________________________________________________________________ e. Theworldrealinterestrateisr*=2%.ThecountryofRiskistancanborrow atthisrateandinvest1000unitsofrealoutputinaprojectwheretheextra payoffinallfutureperiodsis50(weassumenodepreciation).WhatisMPK? Shouldtheyundertaketheinvestmentproject?Explain. MPK=____________________________ Shouldtheyinvest?____________ Explanation: € ΔW 3 f. Inthelastquestion,supposeinvestorslearnofpoliticalinstabilityin Riskistananddemandariskpremiumof+5%.NowRiskistancanonly borrowatarealinterestrateofr*=7%.Shouldtheystilldotheproject? Shouldtheyinvest?____________ Explanation: g. Therearetwostatesoftheworld.Instate1,Homehasoutputandincomeof 60,andForeignhas40.Instate2,Homehasoutputandincomeof40and Foreignhas60.Thereisnonetinternationalborrowingorlending.Ifall incomeiscapitalincome,whatisthebestrisk-sharingoutcomepossible? State1consumption/incomelevels: Home_______Foreign_______ State2consumption/incomelevels: Home_______Foreign_______ Portfolios: Homeowns_______%homeand______%foreigncapital h. Whenacountry’srealexchangeratedepreciatesthen,allelseequal,itstrade balanceshould Circleone: Increase / Decrease i. Underafloatingexchangerateregime,afteratemporaryhomemonetary expansion,intheshortrun,thehomecountry’s(circleanswerineachcase): Nominalinterestrateis… Higher/Lower/Unchanged Nominalexchangerateis…Depreciated/Appreciated/Unchanged Levelofoutputis… Higher/Lower/Unchanged j. Underafixedexchangerateregime,afteratemporaryhomefiscalexpansion, intheshortrun,thehomecountry’s(circleanswerineachcase): Nominalinterestrateis… Higher/Lower/Unchanged Nominalexchangerateis…Depreciated/Appreciated/Unchanged Levelofoutputis… Higher/Lower/Unchanged 4 2.IS-LM-FX[10points] Usethecombined(side-by-side)IS-LM-FXdiagramtoanswerthisquestion. Clearlylabelthefigures:axes,equilibriumpoints,levelsofvariables. Explainthegraphsbrieflyinwords. Assumethehomecentralbankrespondsbyusingmonetarypolicyto stabilizeoutputY,andassumethattheexchangerateisfloating Foreachofthefollowingsituations,usetheIS/LM/FXmodeltoillustratethe effectsoftheshockandpolicyresponsecombined.Foreachcase,statetheeffectof theshockandpolicyresponsecombinedonthefollowingvariables(increase, decrease,nochange,orambiguous):Y,i,E,C,I,TB. a. Shock:Thelevelofforeignincomeincreases(Y*rises).[5] IS-LMdiagram FXmarket Explanationsandeffectsoftheshockandpolicyresponsecombined: 5 b. Shock:Theexchangerateisexpectedtodepreciate(Eerises).[5] IS-LMdiagram FXmarket Explanationsandeffectsoftheshockandpolicyresponsecombined: 6 3.WarandtheCurrentAccount[10points] ThecountryofImperialikestofightwars(sometimes)andsmoothconsumption.It hasaGDPofQ=$1trillion($1000billion)everyyear.Itisyear0andImperiahas zeroexternalwealthW=0initially(inheritedfromyear–1).Theworldrealinterest rateis5%. Ifthereisnowar(i.e.,peace)ImperiaconsumesallGDP,andneverinvests,with C=GNE=GDPinallfutureyears,andI=G=0.However,Imperiastartsawarinyear0. FightingawarcostsG=$84billionperyear. TheLongRunBudgetConstraint(LRBC)applies,asinChapter6.Assumethereareno capitalgainsorcapitaltransfers,KG=KA=0,sothechangeinWeachperiodisexactly equaltoCA.Assumeallquantitiesarerealdollars. a. Itisyear0.Letusassumethat,atfirst,Imperiansthinkthewarwilllastonly 1year,sopeacewillresumeinyear1.Underthatassumption,howmuchwill theyborrowinyear0tofinancethewar?Howmuchdotheycuttheir consumption?[2] Borrow__________________________ Cut________________________(use$billions) [Hint:displayexpectedpathsofQ,C,G,TB,NFIA,CA,Wtoverifytheanswer.] b. Nowtreattheeventsinyear0asgivenaboveinparta.Nowitisyear1,and nowtheImperiansfindtheycan’texitthewar.Theynowupdatetheirbeliefs andnowtheythinkthewarwilllast1moreyear,andpeacewillresumein year2.Howmuchextrashouldtheyborrowatthispoint?Howmuchmore dotheycutconsumption?[2] Borrow__________________________ Cut________________________(use$billions) [Hint:displayexpectedpathsofQ,C,G,TB,NFIA,CA,Wtoverifytheanswer.] 7 c. Thesamethinghappensinyears2,3,and4:eachtime,Imperiansfindthey can’texitthewarandthenexpectittolastonemoreyear.Howmuchmore dotheyborrowandhowdotheycuttheirconsumptioneachtime?[2] Borrow__________________________ Cut________________________(use$billions) d. NowsupposeImperianshadknownthewarwouldlast5years(year0to4) fromtheverybeginninginyear0.Wouldtheyhavechosenthisconsumption path?Whyorwhynot?(Donotprovideanycalculationshere.)[2] e. Itturnsoutthattherestoftheworldwillnotlendunlimitedamountsto Imperia.InfactImperia’sdebtlimitis80%ofImperianGDPor$800billion. HowlongawarcanImperiaaffordtofightusingexternalfinancetosmooth consumptionwhenitproceedsasabove[inpartsa/b/c],extendingthewar oneyearatatime?[2] 8 4.BalanceofPayments[10points] Theyearis2018.Debtland’sGDPis$650billion.Debtlandhasacurrentaccount deficitof$42billion.Debtland’scapitalaccountisina$12billionsurplus.In addition,Debtlandfactorslocatedinforeigncountriesearn$17billion.Debtlandhas atradedeficitof$33billion.AssumeDebtlandneithergivesnorreceivesunilateral transfers,andassumethattherearenocapitalgainsonexternalwealth. a. WhatwasthechangeinDebtland’sexternalwealth(W)during2018?[2] b. ComputeDebtland’snetfactorincomefromabroad(NFIA).[2] c. HowmuchincomedidforeignfactorsofproductionearninDebtland(IMFS)? [2] d. ComputeDebtland’sgrossnationalexpenditure(GNE),grossnationalincome (GNI),andgrossnationaldisposableincome(GNDI).[2] e. IfDebtland’sexternalwealthwas–$150billionattheendof2017,whatwas itattheendof2018.[2]