Hi, Can you give me solution about these questions?

1. Definitions (must be dense but precise/complete)

(10 marks each for a total of 50 marks)

(a) thevolume(or "policymakers") quotation system (with respect to the nominal exchange rate)

(b)therealeffective exchange rate (REER) index

(c)the Marshall-Lerner(-Harberger) condition

(d)static(ornaive) expectations

(e)the"fundamentals"in the asset price approach to the exchange rate

3. The Monetary Approach to the Balance of Payments

The monetary approach to the balance of payments (BoP) was developed in the 1960s, in part within the research department of

28/08/2019

ECM136 2019/20 Exam Paper-Questions 3/5

the IMF under the intellectual leadership of Jacques Polak and in the context of the Bretton Woods system of fixed exchange rates.

(a) Enumerate its main assumptions. (20 marks)

(b) Analyse and interpret its equilibrium condition, which we wrote in the lectures as:

= + + + ( 1 )

wherejQuery22408785624443392217_1614076177687?is (the log of) international reserves,?is (the log of) the nominal exchange rate,jQuery224024328427074649828_1614076326946is (the log of) theForeignprice level,??is (the log of)Homeoutput,??is theForeigninterest rate,??is (the log of) domestic credit,0 < ? < 1is the fraction of international reserves in the total assets of the central bank,? > 0is the income elasticity of money demand and? > 0is the interest-rate semi- elasticity of money demand. (30 marks)

4. Meese and Rogoff's (1983) Exchange Rate Disconnect Puzzle

(a) Using the reported results in Table 1, describe the work of Meese and Rogoff (1983) and define the exchange rate disconnect puzzle. (25 marks)

(b) Summarise how the literature on exchange rate modelling and forecasting developed in response to Meese and Rogoff (1983). In particular, enumerate what is known at present about the predictability or not of exchange rates (you should be able to list at least half a dozen conclusions-without the need to cite precise references). (25 marks)

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ECM136 2019/20 Exam Paper-Questions 4/5

Table 1-Root Mean Squared Error (RMSE) of the Exchange Rate Models. Source: Meese and Rogoff (1983).

(End of Question Paper)

5. Intertemporal Approach to the Current Account

The intertemporal approach to the current account, as illustrated in the simple two-period model of a small open economy, involves the following optimisation problem of the representative agent:

subject to the present-value intertemporal budget constraint:

where ciis consumption and yiis the endowment of a perishable good, with the subscript i = 1, 2 referring to the time period; Uldenotes lifetime utility, u(c1) and u(c2) being the instantaneous utilities in each of the two periods; and the constants 0 << 1 and r are, respectively, the subjective discount factor and the real interest rate.

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ECM136 2019/20 Exam Paper-Questions 5/5

(a) Derive and interpret the first-order conditions for this general optimisation problem. (15 marks)

(b) Analyse the role of international borrowing and lending by focusing on the special case when 1and y1< y2. (35 marks)

1r

(End of Question Paper)