Suppose, as in Chapter that in the first model in this chapter there is limited commitment in the credit relationships between the small open economy and the rest of the world. There is some portion of the nation’s capital stock, denoted by Kc, which is collateralizable on world markets. This collateralizable capital is illiquid in the current period and is valued at price p on world markets in the future period. Assume that borrowing by the SOE on world markets is limited by the value of collateralizable wealth in the future period. Now, suppose that p falls. How does this affect consumption in the SOE in the present and the future, and the current account surplus? Explain your results with the aid of diagrams.
Answer to relevant QuestionsConsider the following data on real GDP per capita in the United States:Year U.S. Real GDP Per Capita (2005 dollars)1950 ............. $13,2441960 ............. $15,7731970 ............. $20,9941980 ...Use the second model in this chapter, with production and investment, to answer this question. The government in a small open economy is concerned that the current account deficit is too high. One group of economic advisers ...Suppose in the model that government expenditures increase temporarily. Determine the effects on aggregate output, absorption, the current account surplus, the nominal exchange rate, and the price level. What difference does ...Suppose in the New Keynesian open-economy model, that there is a positive output gap. There is also a liquidity trap at the world level, in that r* = 0. Is there anything that economic policy can do to close the output gap? ...How would we modify the Friedman rule in the context of a New Keynesian sticky price model like the one in Chapter, assuming that monetary policy is the only policy that can be used to close output gaps? Explain.
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