Macroeconomics Problem Set 5 - Week 7 - Prof. García, Apuntes de Economía

¡Descarga Macroeconomics Problem Set 5 - Week 7 - Prof. García y más Apuntes en PDF de Economía solo en Docsity! Macroeconomics I (22104) UPF, Year 2013-2014 – Prof. Davide Debortoli Page  1  of  2   Problem Set 5 – Week 7 (due on Nov. 19th in class, or using Aula Global) Note: BAG stands for Macroeconomics : A European Perspec t ive , by O. Blanchard, A. Amighini and F. Giavazzi. 1. Problem 1, page 409, BAG Using the information in this chapter, label each of the following statements true, false or uncertain. b. A sudden fear that a country is going to devalue may force an exchange rate crisis, even if the fear initially had no basis. c. Because economies tend to return to their natural level of output in the medium run, there is never a reason to devalue. d. High labor mobility within Europe makes the euro area a good candidate for a common currency. e. Changes in the expected level of the exchange rate far in the future have little effect on the current level of the exchange rate. 2. Problem 2, page 409, BAG Consider a country operating under fixed exchange rates. Assume that the economy is initially in medium-run equilibrium, with a constant price level and output equal to its natural level. Foreign output, foreign price and the foreign interest rate are fixed. Assume that expected (domestic) inflation remains constant throughout the problem. a. Draw an AD-AS diagram for this economy. b. Now suppose there is an increase in government spending. Show the effects on the AD-AS diagram in the short run and the medium run. How do output and price change in the medium run? d. What happens to the real exchange rate in the medium run, considering the effect on the price level? What happens to net exports in the medium run? e. Given that the exchange rate is fixed, what is the domestic nominal interest rate? Does the increase in government spending affect the domestic nominal interest rate? What happens to the real interest rate and investment in the medium run? f. In a closed economy, how does an increase in government spending affect investment in the medium run? g. Comment on the following statement. “In a closed economy, government spending crowds out investment. In an open economy with fixed exchange rates, government spending crowds out next exports.”