08 Jun Question ECO 365 – International Monetary Economics
Question
ECO 365 – International Monetary Economics
SHORT-ANSWER QUESTIONS
1. [10 points] Why do most economists worry about the US current de?cit?
2. [10 points] Why does globalization sets constraints on governments’ capacity to raise the
revenues?
3. [10 points] Explain the IMF morall hazard theory.
QUESTIONS FROM THE BOOK
4. [10 points] A Canadian buys a share of German stock, paying by writing a check on an
account with a Spanish bank. Explain how the following transaction shows up in the
balance of payments accounts of Canada.
5. [10 points] A tourist from Montreal buys a meal at an expensive restaurant in Barcelona,
Spain, paying 200 Canadian dollars worth in Euros with a Visa credit card issued by
CIBC. Explain how the following transaction shows up in the balance of payments
accounts of Canada.
6. [10 points] Suppose the Canadian Dollar exchange rates of the Euro and the Yen are
equally variable. The Euro, however, tends to depreciate (appreciate) unexpectedly
against the Canadian dollar when the return on the rest of your wealth is unexpectedly
high (low), while the Yen tends to appreciate (depreciate) unexpectedly in the same
circumstances. As a Canadian resident, which currency, the Euro or the Yen, would
you consider riskier?
PROBLEM
7. [40 points] Consider the two-period small open economy presented in class. Lifetime
utility is given by U = log(C1 ) + ? log(C2 ). The endowment each period is Y1 = 10
and Y2 = 35; agents start period 1 with zero net foreign wealth, B1 = 0. The interest
rate in global capital markets is 50 percent, r = 0.5. Finally, assume that ?(1 + r) = 1.
a. Write the two period-by-period budget constraints and the intertemporal budget constraint (de?ne any new variables that you use).
b. Solve for consumption in each period. (Note: Recall that ?log(C)
?C = 1
).
C c. What is the current account in the ?rst period? Does the agent borrow or lend in
international markets in the ?rst period? If so, how much?
d. Explain the relationship between international borrowing and lending and intertemporal
trade (in terms of present and future consumption). 1
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