Macro Economics Mid Semester Assignment

Section A

Problem Set 8 External Adjustment in Small and Large Economies

1. Consider a two-period, two- country, endowment economy. Let one of the countries be the United States (U) and the other Europe (E). Households in the United States have preferences described by the utility function ln C U 1 + ln C U 2 , (1) where C U 1 and C U 2 denote consumption of U.S. households in periods 1 and 2, respectively. Europeans have identical preferences, given by ln C E 1 + ln C E 2 , (2) where C E 1 and C E 2 denote consumption of European households in periods 1 and 2, respectively. Let QU 1 and QU 2 denote the U.S. endowments of goods in periods 1 and 2, respectively. Similarly, let QE 1 and QE 2 denote the European endowments of goods in periods 1 and 2, respectively. Assume further that the endowments are non-storable, that the U.S. and Europe are of equal size, and that there is free capital mobility between the two economies. The United States starts period 1 with a zero net foreign asset position. (a) Symmetric Equilibrium Suppose that QU 1 = QU 2 = QE 1 = QE 2 = 10. Calculate the equilibrium world interest rate, and the current accounts in the United States and Europe in period 1. (b) US-Originated Contraction 1 Suppose that a contraction originates in the United States. Specifically, assume that QU 1 drops from 10 to 8. All other endowments (QU 2 , QE 1 , and QE 2 ) remain unchanged at 10. This contraction in output has two characteristics: First, it originates in the United States (the European endowments are unchanged.) Second, it is temporary (the U.S. endowment is expected to return to its normal value of 10 after one period). Calculate the equilibrium interest rate and the current accounts of the United States and Europe in period 1. Provide intuition. (c) US-Originated Contraction 2 Consider now a second type of contraction in which the U.S. endowment falls from 10 to 8 in the first period and is expected to continue to fall to 6 in the second period (QU 1 = 8 and QU 2 = 6). The endowments in Europe remain unchanged at 10 each period (QE 1 = QE 2 = 10). Like the one described in the previous item, this contraction originates in the United States. However, it differs from the one described in the previous in that it is more protracted. Calculate again the equilibrium interest rate and the two current accounts in period 1. Point out differences in the effects of the two types of contraction and provide intuition. (d) At the beginning of the great contraction of 2008, interest rates fell sharply around the world. What does the model above say about people’s expectations around 2008 regarding the future path of real activity.

Section B

Assignment 4 (Short-Answer and Algebraic Questions): (The numbers in square brackets give the breakdown of the points for various parts of each question. To receive full credit, please explain your answers. Total of 60 points plus 10 points extra credit.)

1. This questions is based on the article, “Signs of a slowdown,” published by The Economist on June 6, 2015. The article discusses the trends in the value of the yen and its consequences during 2012 and 2015. The average annual rate of inflation during 2013 and 2014 was 1.55 percent in both the US and Japan. Assume that the yen is the home currency so that the exchange rate is expressed in terms of US dollars per yen and the appreciation/depreciation is calculated as the percentage change of that exchange rate.
2. The article and its chart[1] show that the yen-dollar exchange rate at the end of 2012 was e₀ =1/87$/¥ and by the end of 2014 reached e₁ = 1/120$/¥. By what percentage did the yen depreciate vis-à-vis the dollar in nominal terms in those two years? [4] By what percentage did the yen depreciate vis-à-vis the dollar in real terms in those two years? [3]

Answer:

• [5]

Answer:

• The article points out that global trade of the main emerging markets except China and Hong Kong saw weaker exports in early 2015 compared to the situation during the same period in 2014. What were the causes of that sluggishness highlighted by the article? [7]

Answer:

• According to the article, in the situation prevailing in 2014 and early 2015, central banks were happy to see their currencies weaken. Why did this lead to exporting deflation to the rest of the world? [6]

Answer:

• Extra Points Question: The article states that “QE means that central banks are absorbing an awful lot of new government debt.” How does this help keep sovereign-bond yields low? What are the potential problems that this policy may cause for the world economy? [10]

Answer:

• This question is based on a speech, U.S. Economic Outlook and Monetary Policy, by the Fed Vice Chair Richard H. Clarida on May 21, 2020, at the New York Association for Business Economics. In that speech, Richard Clarida first lays out the economic outlook at the time and then discusses the Fed’s policy responses to the situation.
• In his speech, Clarida points out that while economic situation seemed dire at the time, financial conditions had improved considerably after mid-March. What was his explanation for this contrast between economic and financial circumstances? [6]

Answer:

• In his speech, Clarida mentioned a number of policy measures that the Fed had taken to reduce the economic and financial impact of the COVID-19 pandemic. Which measures that he mentioned were conventional and which ones were unconventional? [12]

Answer:

• China has a trade surplus and the People’s Bank of China (PBC, China’s central bank) purchases all the excess foreign currency earning of the country’s exporters. This policy is equivalent to bond purchases by the PBC through open market operations.
• What is the impact of the PBC’s policy of foreign currency purchase on the country’s money supply? [7]

Answer:

• If all foreign conditions are exogenous and the aggregate real income, the price level, and the future conditions of the Chinese economy (including the expected exchange rate) can be taken as given, what is the consequence of the policy for the current interest rate and the spot exchange rate in China? [10]

Answer:

Section C

You are a group of advisors to the Management Board in your company with Headquarters in Australia. As advisors you are first, required to conduct research on your selected sector/industry covering the previous 5-
10 years. Second, you are required to present a company strategy to your Management Board covering the next 5 years. Third, your Management Board requires that you make a presentation of your findings and strategies, and you prepare a 2,500-word market report. The market report should, as a minimum, address the following key issues:
1. A description of your company and the industry your company
2. An analysis of the market structure the industry
3. A discussion about the demand and supply conditions for your product(s) or service(s).
4. A discussion about the demand elasticity for your product(s) or service(s)
5. An analysis of a recent event that has (or is likely to have) substantial impacts on your industry/sector.
Note: if your company has many products and/or services, you can select a representative product/service to
discuss for points (2); (3); (4); and (5).
This report should provide useful information for your company’s Management Board. It should use a variety of resources, including the textbook, newspapers, industry reports, the ABS website, and other sources.

Section D

Question 1)

The Oslo Accords (including the Protocol on Economic Relations) signed in 1994 had set the stage for the National Palestinian Authority (NPA) to assume political and economic sovereignty in major WBG cities. Although, the skewed integration with Occupation state )Israel( economy (the dependence on) Israeli( economy) did not structurally change. The Palestinian Central Bureau of Statistics (PCBS) have published data for national accounts for this period:

http://www.pcbs.gov.ps/site/lang__ar/507/default.aspx

Use the data posted in this web-link to answer the following questions:

1. Use graph to describe changes in real GDP between 2004 and 2014.
2. Use pie graph to describe the share of GDP components in 2014.

Question 2)

The relative recovery of the Palestinian economy prevailed in the 90s was cut short by the breakout of the Second Intifada in September 2000. Following this date, Palestinians endured devastating measures including, relentless Israeli internal and external closures, loss of land and other natural resource, an astronomical rise in unemployment, mainly due to the termination of labor inflow to Israel, and the purposely destruction of physical infrastructure by Israel.

Based on the data posted on:

http://www.pcbs.gov.ps/site/lang__ar/507/default.aspx

1. Use graph to describe changes in real GDP between 2000 and 2008.
2. What is  the GDP component that cause the  change in read GDP between 2000 and 2008.

Question 3)

In short, talk about the most important provisions  of  Paris economic agreement ( Paris Protocol) signed in 1994, explain  its effects on the Palestinian economy.

Question 4 )

In brief, the commodity and geographical distribution of Palestinian foreign trade?