A problem set with 3 Questions about intermediate quantitative economics
the questions are also in the attached file
please take pictures of the writing on A4 papers or upload as a pdf
here are the questions
1. Classical small open economy model: Suppose for the sake of this problem that the U.S. can be modeled as a small open economy. (This is not exactly true, but for many questions it may still give us good insights.) Remember that the U.S. is a country that typically runs a large current account deficit and a large capital account surplus.
- a) Draw a loanable fund market diagram that roughly corresponds to the U.S. economy. Be sure to locate the world real interest rate r* so that your diagram shows a capital account surplus (I > S).
- b) Draw a net exports diagram that roughly corresponds to the U.S. economy. Be sure that your diagram shows a current account deficit.
- c) In the early 2000s, then-Chairman of the Federal Reserve Ben Bernanke said that there was a â€œglobal savings glutâ€â€”an exogenous increase in the supply of world savings. What is the effect of a global savings glut on the world real interest rate? (Remember that the world is a closed economy.) Use a loanable funds diagram to help illustrate your answer.
- d) In response to the global savings glut, what happens to U.S. national savings, investment, and the capital account balance? (Assume that there is no increase in the U.S. savings rate, which was the case at the time, but remember that there is an effect on the world real interest rate, from part c.) Use a loanable funds diagram (for the U.S.) to help illustrate your answer.
- e) Continuing part d), what happens to the U.S. trade balance and real exchange rate? Use a net exports diagram to help illustrate your answer.
2. Classical small open economy model: According to the Classical small open economy model, what happens to domestic national saving, investment, the trade balance, and the real exchange rate in response to each of the following events? Draw a loanable funds market diagram and a net exports diagram to illustrate your answer in each case. (For these diagrams, letâ€™s assume that the country starts out running a current account surplus and capital account deficit, as in the examples in class.)
- a) A fall in consumer confidence about the future induces domestic consumers to spend less and save more.
- b) A tax reform increases the incentive of businesses to build new factories.
- c) The introduction of a stylish new domestically-produced electric car makes someconsumers switch from buying a foreign-produced car to buying a domestic one.
- d) The country imposes a tariff on foreign-produced goods. (For simplicity, suppose that theeffect of the tariff is the following: at every value of the real exchange rate, the demand for domestic goods is higher and the demand for foreign goods is lower.) You might find it surprising that the equilibrium trade balance doesnâ€™t change in this example; briefly give some intuition for why the Classical Small Open Economy Model implies this result.
3. Money multiplier and the quantity of money: Suppose that the introduction and convenience of internet banking services reduces the publicâ€™s demand for currency relative to deposits.
- a) What happens to the money multiplier?
- b) What would happen to the amount of money M and deposits D in the economy?
- c) Suppose that banksâ€™ desired level of reserves relative to deposits remains unchanged.What happens to banksâ€™ demand for reserves R?
- d) If the central bank wanted to keep the total quantity of money M from changing, what aretwo things that it could do?