TIME ALLOWANCE:  SEE MOODLE PAGE ASSESSMENT SECTION

Answer ALL questionsfrom Part A and ALL questionsfrom Part B

The Summer Take Home Exam comprises 75% of yourfinal mark.

Part A comprises 6 questions and carries 25 points; Part B carries 50 points, split equally between Question B1 and Question B2.

Answers must be typed, although you can paste in hand-written equations and hand-drawn figures   labelled with your 4-digit candidate number. You may use written, diagrammatic, and mathematical arguments as appropriate. All diagrams and data charts must be constructed by you; pasted in figures from slides, textbooks, published or unpublished material produced by someone else will not be awarded marks. Similarly, equations cannot be pasted in from another source. You may paste simulator output into your answer document.

PART A

Answer ALL questions from this section. For each question identify the statement as True, False, or Uncertain. Explain your reasoning in a total of not more than 120 words. The maximum marks for each question will be given for a full and correct explanation.

A1. According to the 3-equation model studied in the module, foreign exchange market and bond traders take account of the nominal but not the real UIP condition in making their trading decisions.

A2. In the 3-equation model, in the absence of a lagged effect of monetary policy on aggregate demand, both supply and demand shocks can be offset without any consequences for employment.

A3. Compare a closed with an open economy, each of which is initially in medium-run equilibrium and has an inflation-targeting central bank. Assume that both are modelled by the 3-equation model and wage-setters use the producer rather than the consumer price index. Statement: The response of output and inflation to a decision by the central bank to raise the inflation target is identical in the closed and open economies.

A4. If a climate change-related shock wipes out a domestic tradeables industry (e.g. through drought) and is modelled as a permanent negative trade shock for the home economy, the long-run real exchange rate is depreciated.

A5. Economic theory and experience during the pandemic suggest that countries whose governments borrow in a currency they do not issue are susceptible to a sovereign debt crisis in a time of fiscal stress.

A6. Assume that the cause of a recession is a fall in autonomous consumption or investment. The government financial balance (also referred to as the government budget balance) and the external financial balance move inversely with the private sector financial balance. Refer to Figure A6 in   your answer.

Figure A6. China Sector Financial Balances, 1982-2021 (Source: OECD Economic Outlook, Various years).

Question B2 [25 points]

Consider two small open economies called V and X that are identical except for their exchange rate regime and the choice of policy instruments available to them. A single identical shock hits each economy, and you are provided with output from simulations of the shock and its aftermath. The    simulation output in the form of impulse-response functions is shown below in Figure B2 (where a single line is shown, the two paths coincide). You are tasked with writing a report describing the shock, diagnosing the nature and effects of the shock and identifying the policy interventions that   have been implemented in each economy (consistent with the simulations shown).

Figure B2. Output from the Macroeconomic Simulator (Carlin and Soskice).