PROBLEMS FROM TEXTBOOK

PROBLEMS FROM TEXTBOOK

From Chapter 13

Problem 10 page 339 in 10th edition (p. 318 in 9th edition)

From Chapter 14

Problem 1 page 372 in 10th edition (Problem 1 p. 347 in 9th edition)

Problem 7 page 372 in 10th edition (Problem 6 page 348 in 9th edition)

ADDITIONAL PROBLEMS AND QUESTIONS

PROBLEM A

Suppose that there are only two economies in the world, Green and Red. All numbers below are in billions of dollars.

Assume that Green’s National Saving is 2000 while Red’s National Saving is 2400. Investment in Green is 1800.

A1 What is the current account in Green? Is Green running a current account surplus or deficit?

A2 What is the current account in Red? Is Red running a current account surplus or deficit?

A3 What is Investment in Red?

A4 What would happen to Green’s current account if Green’s investment were to increase to 2000, while national saving in Green remained the same as before (2000)?

A5 Assuming that national saving were to remained unchanged in Red as well (at 2400), how would investment have to adjust in Red following Green’s investment increase from 1800 to 2000 (still assuming that national saving is 2000 in Green)?

PROBLEM B (SAVING GLUT QUESTIONS)

B1 What did Ben Bernanke mean by “global saving glut”?

B2 What did Paul Krugman mean by “revenge of the glut” in his March 2, 2009 New York Times article? Did Krugman agree with Bernanke?

B3 Did Menzie Chinn agree with Bernanke and Krugman? Why or why not?

PROBLEM C

C1. Assume that on December 1st, 2015 the interest rate on dollar deposits in the U.S. is 0.01 (that is, 1 per cent) per year and the interest rate on taller deposits in Lotharingia is 0.03 (that is, 3 per cent) per year (the taller is Lotharingia’s currency).

If people expect that the exchange rate on December 1st, 2015 will be 1.96 dollars per taller, and the interest rate parity condition holds, what is the current exchange rate in terms of dollars per taller on December 1st , 2015? Does this mean that people expect an appreciation or a depreciation of the taller between today and one year from now?

Illustrate your answer graphically, using a graph with the rates of return (in dollars terms) on the horizontal axis, and the exchange rate on the vertical axis.

C2. Now, assume that on December 2nd, 2015 the Queen of Lotharingia suddenly declares that she is going to abdicate next year, and therefore, effective January 1st, 2016 she will be succeeded by her son, Ludwig the Depreciator. The future King is expected to implement new policies after he takes over. As a result,

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