Blog

Theory Question 1 (4 Parts) Consider a two-period small open economy where the representative household has a utility function of the form

Part C Suppose, for the rest of the question, that the representative household faces a borrowing constraint of the form

Theory Question 2 (2 Parts) Suppose that households in the economy have the following lifetime utility function:

Bruce and Sheila have been discussing the effects of an increase in the desire to save of the Rest of the World (RoW) on the world interest rate and the US current account balance. Bruce claims that both the world interest rate and the US current account balance should increase, while Sheila says that both should decrease. Which of the two is right?

Assume an economy where households face borrowing constraints. Here, a present tax cut will increase present consumption, while a present tax hike will decrease it.

Theory Question 2 (2 Parts) Suppose that households in the economy have the following lifetime utility function:

Permanent terms of trade shocks and permanent productivity shocks have different effects on the current account because the former are perceived as income changes, while the latter as changes in the productive capacity of the economy

Empirical Question (2 Parts) Suppose that you estimate the following regression model

Submit Your Written Work for a Partial Credit Opportunity To provide you the opportunity to receive partial credit for your work, please follow these steps to upload a PDF or images of the paper you used during this exam: Step-by-Step Instructions: Carefully scan or photograph each page of your written work. Ensure that each page is clear, well-lit, and oriented correctly. Compile all scanned images into a single PDF file if possible. You can use free apps or online tools for this purpose. Review the compiled PDF or images to confirm that all parts of your work are legible and correctly displayed. Upload the file(s) to this question.

An alternative definition of the current account is equal to a country’s gross domestic product minus its national savings.