Consider a small open economy with 2 periods and a single non- storable good. Preferences of...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Consider a small open economy with 2 periods and a single non- storable good. Preferences of the representative household are described by the following utility function: U(C,C) = In C + C In periods 1 and 2 households receive a constant endowment of Q = Q = Q. Households have access to financial markets, where they can lend or borrow at the international interest rater. The initial net foreign asset position of the representative household is B = 0. Suppose that Q>. (a) [10 Points.] Set up the budget constraint of households for periods 1 and 2. Derive the inter-temporal budget constraint. (b) [10 Points.] Find the equilibrium levels of consumption and the current account for periods 1 and 2. Your answer should depend on the parameters r* and Q. (c) [8 Points.] What happens to consumption and the current account in period 1 when the interest rate r increases? Provide intuition for your results. Now suppose households have uncertainty regarding their future endowment. In par- ticular, the endowment can be Q = Q- with probability 2/3 or Q = Q + 20 with probability 1/3. Agents preferences are now given by U(C, C2) = ln C+E[C]. where E[] indicates expected value. (d) [2 Points.] Compute the expected value of the endowment in period 2. (e) [10 Points.] Set up the maximization problem for the households and find equilibrium levels of consumption in periods 1 and 2 (there should be more than one consumption in period 2, depending on the realization of the endowment). (f) [8 Points.] Are there precautionary savings in this economy? Why or why not? Provide intuition. Consider a small open economy with 2 periods and a single non- storable good. Preferences of the representative household are described by the following utility function: U(C,C) = In C + C In periods 1 and 2 households receive a constant endowment of Q = Q = Q. Households have access to financial markets, where they can lend or borrow at the international interest rater. The initial net foreign asset position of the representative household is B = 0. Suppose that Q>. (a) [10 Points.] Set up the budget constraint of households for periods 1 and 2. Derive the inter-temporal budget constraint. (b) [10 Points.] Find the equilibrium levels of consumption and the current account for periods 1 and 2. Your answer should depend on the parameters r* and Q. (c) [8 Points.] What happens to consumption and the current account in period 1 when the interest rate r increases? Provide intuition for your results. Now suppose households have uncertainty regarding their future endowment. In par- ticular, the endowment can be Q = Q- with probability 2/3 or Q = Q + 20 with probability 1/3. Agents preferences are now given by U(C, C2) = ln C+E[C]. where E[] indicates expected value. (d) [2 Points.] Compute the expected value of the endowment in period 2. (e) [10 Points.] Set up the maximization problem for the households and find equilibrium levels of consumption in periods 1 and 2 (there should be more than one consumption in period 2, depending on the realization of the endowment). (f) [8 Points.] Are there precautionary savings in this economy? Why or why not? Provide intuition.
Expert Answer:
Answer rating: 100% (QA)
a The budget constraint of households for periods 1 and 2 can be set up as follows Period 1 C B Q Period 2 C 1 rB Q where C and C represent consumption in periods 1 and 2 B represents the net foreign ... View the full answer
Related Book For
Money Banking and Financial Markets
ISBN: 978-0078021749
4th edition
Authors: Stephen Cecchetti, Kermit Schoenholtz
Posted Date:
Students also viewed these economics questions
-
Think of an example within a company where change was attempted but failed. Using the concepts presented in this module's readings, discuss what contributed to the failure and what might have been...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
What does this equation represent? Is it horizontal lines or straight lines with slope -1 ? or sth else? +272 G86 =36)
-
Find each limit in Problems 3760. Note that LHpitals rule does not apply to every problem, and some problems will require more than one application of LHpitals rule. lim x 3 x + 3xx - 3 X x + 6x + 9
-
Two capacitors, C1 = C and C2 = 2C, are connected to a battery. (a) Which capacitor stores more energy when they are connected to the battery in series? Explain. (b) Which capacitor stores more...
-
Find the mean and compare it with the median. Find the standard deviation and compare it with the interquartile range. For the phone call data in Prob. 2 Data from Prob. 2 6 6 4 2 1 7 0 4 6 7
-
In the open-systems view of organizations, such things as technology, information, and money are considered ____________. (a) transformation elements (b) feedback (c) inputs (d) outputs
-
An article in the Materials Research Bulletin (Vol. 26, No. 11, 1991) investigated four different methods of preparing the superconducting compound PbMo6S8. The authors contend that the presence of...
-
2. A regular hexagon on the pseudosphere H is inscribed in a c cosh r=3. Find the exact value of cosh s where s is the length of ea Please do not use a calculator. Please fully justify your answer.
-
On June 1, Year 1, Tsanumis Corporation (a U.S.-based manufacturing firm) received an order to sell goods to a foreign customer at a price of 1 million euros. The goods will be shipped and payment...
-
The founder of Alchemy Products Inc. discovered a way to turn gold into lead and patented this new technology. He then formed a corporation and invested $900,000 in setting up a production plant. He...
-
As a general rule, Employers are responsible for the actions of their employees when the employees are acting within the scope of their employment. On the other hand, Principals are not responsible...
-
What refers to the specific actions taken on the journey to our objective. These actions are smaller in scope and spring from best practices within the organization?
-
1) Entries for Direct Labor and Factory Overhead Townsend Industries Inc. manufactures recreational vehicles. Townsend uses a job order cost system . The time tickets from November jobs are...
-
Determining Market-Based and Negotiated Transfer Prices Carreker, Inc., has a number of divisions, including the Alamosa Division, producer of surgical blades, and the Tavaris Division, a...
-
What actions can Ben take to reconcile loyalty to his friend, his commitment to integrity, and his own professional well - being?
-
15-24. Basic Transfer Pricing Issues (LO 15-1) Hamlet Industries is organized into two divisions, Fabrication and Finishing. Both divisions are considered to be profit centers, and the two division...
-
For the following exercises, find the inverse of the function and graph both the function and its inverse. f(x) = 4 x 2 , x 0
-
Which of the following investments in the following table would be most attractive to a risk-averse investor? How would your answer differ if the investor were described as risk-neutral?...
-
Another way to understand stock market risk is to examine how investors expect risk to evolve in the near future. The DJIA volatility index (FRED code: VXDCLS) is one such measure. Plot the level of...
-
Splitland is a developing economy with two distinct regions. The northern region has great investment opportunities, but the people who live there need to consume all of their income to survive....
-
Assume your U.S. firm currently exports to Mexico on a monthly basis. The goods are priced in pesos. Once material is received from a source, it is quickly used to produce the product in the United...
-
Using the information in the previous question, consider a proposal to price the exports to Mexico in dollars and to use the U.S. source for material. Would this proposal eliminate the exchange rate...
-
Assume that the dollar is expected to strengthen against the euro over the next several years. Explain how this will affect the consolidated earnings of U.S.-based MNCs with subsidiaries in Europe.
Study smarter with the SolutionInn App