assignment

Question 1

Borduria is a small country that pegs its exchange rate to that of Syldavia, a much larger country. A conservative party forms the government in Syldavia and reduces spending. At the same time, the Central Bank of Syldavia, concerned about deflation, increases money supply to the point that there is no change in output. How does this affect output in Borduria if it continues to maintain the peg?

Question 2 [III points} Consider the model of sovereign default that we studied in class. Assume that output is dis- tributed uniformly between I? V and 17', where V = of\". [a] Show that the probability that the country repays the debt, p, is given by _ e1} (1 + 1'st _ on? ' P (3 points) [In] How does p change when n rises? Explain. [2 points) [e] Dene the loan supply curve. (1 point} [d] Show that the loan supply tome has the following shape: - 17' I rL=r,1fLiiil-5-. . rLisinereasinginLifL} il-Ti. [4 will\")