Suppose in the first model in this chapter that there is a limited commitment friction and the possibility the nation could default in the current or future periods. Suppose that, if the nation does not default, then the limited commitment constraint does not bind. Could default still be preferred in the current period to not defaulting? Explain, with the aid of a diagram.
Answer to relevant QuestionsSuppose, 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 ...In the equilibrium small open-economy model, suppose that total factor productivity increases temporarily.(a) If the exchange rate is flexible, determine the effects on aggregate output, absorption, the current account ...Suppose in the New Keynesian open-economy model, that there is an increase in future total factor productivity.(a) Under a flexible exchange rate, what are the equilibrium effects? Should economic policy respond to the ...Suppose that there are shocks total factor productivity which cause aggregate output to fluctuate. What does this imply for the Friedman rule, that is, how should the central bank conduct monetary policy optimally? Discuss.Suppose that the central bank is in a repeated relationship with the private sector. If the inflation rate is i = i* and output is Y = YT, then suppose the reward each period to the central bank is u1. If consumers ...
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