China and the US are each 30% of the world economy, Canada is a small country. The data for two-period growth is:

Y1 Y2

China 6% 10%

US 6% 5%

Canada 4% 2%

ROW 0% 0%

a. At thetop of your answer, please summarize for each country each of the 3 final outcomes.

(1) DEFICIT/SURPLUS (2) EXCESS D/S OF BONDS (3) H CHANGE

Make sure you have worked out thegraphsfor each country and the world market r* as a key intuitive check on your analysis.

Numerical Solution Method: Determine the wealth effect for each country to determine Cd(W) and Cd(W*).Then, work out the common change in r* (and Cd(r))needed to restoreworld market supply/demand equilibrium. The change in Cd(r) will be fed to all countries.

b. Show afirsttable describing the percentage changes in each country and the world for all items except the last two. This will determine the CA change.

Y Cd(W) Cd(r) Cd(total) (Y-Cd) (Bd-Bs) (H1- Ho)

China

US

Canada

ROW

World

c. Assuming Hd(r) = Cd(r) and Hd(W) = .5Cd(W) and using the percentage changes previously determined for Cd, make the following table. P* should then

be determined, from which you can get the change in H in each country. Substitute the (H1- Ho) percentages so determined into the first table above. This exercise is essentially what we did in the money market equations underneath our graphs. We are assuming the world money supply H* is fixed.

Hd(W) Hd(r) Hd (total) P* (H1- Ho)

China

US

Canada

ROW

World

d. Calculate (Bd-Bs) as the residual in the first table. Do all the signs of the changes in this term square with your graphical intuitions?

e. Summarize briefly in words what is going on in this world scenario.