the trade balance, TB); and the current account, CAy. (e) Now consider an interest-rate hike in period 1. Specifically, assume that as a result of turmoil in international financial markets, the world interest rate increases from 20 percent to 30 percent in period 1. Find the equilibrium levels of saving, investment, the trade balance, the current account, and the country's net foreign asset position in period 1. Provide intuition. (f) Suppose that the interest rate is 20 percent, and that A, increases to 4. Calculate the equilibrium values of output, consumption, saving, investment, and the current account in period 1. Provide an intuitive interpretation of the adjustment to the transitory productivity shock. (g) Suppose that the interest rate is 20 percent, that An = 3:, and that Ay increases from 3.2 to 4. Calculate the equilibrium values of consumption, saving, investment, and the current account in period 1. Explain your findings. 3. Terms of Trade Shocks in a Production Economy. Palm oil represents a large share of exports in Indonesia. Suppose that the price of palm oil is expected to fall significantly next year. Use a graphical approach to analyze the effect in the present year of this expected future change in the price of palm oil on Indonesia's saving, investment, and current account. Consider the effects of this terms of trade shock for two cases: (2) Indonesia is a small open economy; (b) Indonesia is a closed economy- 4. In Delhi, a haircut costs 135 rupees (INR.). The same haircut costs 15 Singapore dollars (SGD) in Singapore. At an exchange rate of 50 INR. per SGD, what is the price of an Indian haircut in terms of a Singapore haircut? Keeping all else equal, how does this relative price change if the INR. depreciates to 55 INR. per SGD? Compared to the initial situation, does a Singapore haircut becomes more or less expensive in relation to an Indian haircut? 5. Petroleum is sold in a world market and tends to be priced in U.S. dollars. The Phosphate Group of Morocco must import petroleum to produce fertilizer and other chemicals. The Phosphate Group sell its products in both local and overseas markets. How are its profits affected when the Dirham (Moroccan currency) depreciates against the dollar? 6. Suppose the Mexican peso (MXN) interest rate and the Indian rupee (INR.) interest rate are the same, 3 percent per year. What is the relation between the current equilibrium INR/MXN exchange rate and its expected future level? Suppose the expected future INR/MXN exchange rate, 3.40 INR. per Mexican peso, remains constant as Indian's interest rate rises to 10 percent per year. If the Mexican interest rate also remains constant, what is the new equilibrium INR/MXN exchange rate? 7. In class, we developed our diagrammatic analysis of foreign exchange market equilibrium from the perspective of the U.S. We could have developed a similar analysis from the perspective of Europe, with the euro dollar exchange rate E(= 1/B ) on the vertical axis, a schedule vertical at A. to indicate the euro return on euro deposits, and a downward-sloping schedule showing