ECOS3029: Assignment 1
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ECOS3029: Assignment 1. Marked out of 70. Answer all parts of all questions. Please provide supporting details of your calculations.
1) [9 marks] National Accounts Exercise. Suppose that the value of national account aggregates in China for a year are:
Exports of goods and services: ¥250;
Imports of goods and services: ¥160;
Private consumption expenditure: ¥300;
Government consumption expenditure: ¥100;
Government tax revenues: ¥150;
Investment: ¥200;
Income received from foreign investments: ¥50;
Income paid to foreign investors: ¥50.
a) [3 marks] If the above list of transactions is complete, what is the Trade
Balance for China as a % of Chinese Gross National Income (GNI), correct to at least 1 decimal place?
b) [3 marks] What is the Current Account Balance for China as a % of Chinese GNI, correct to at least 1 decimal place?
c) [3 marks] What is the value of total savings in the economy?
2）[25 marks] Intertemporal Model. Assume that a small open economy runs for 2 periods and has production, investment, and a representative consumer with:
• Lifetime utility function: ul = ln(c1 ) + βln (c2)
• Production function: yt = Kto.7 where the initial capital stock is K1 = 100
• Capital Stock in Period 2: K2 = K1 + I1, where I1 is period-1 investment
• Access to international credit markets at an interest rate r=0.15.
• β(1+r)=1.
• Initial Net International Investment Position: B1 = 0.
a. [3 marks] Write down the maximization problem for the representative consumer
b. [8 marks] Solve for the optimal investment level I1 for the economy in period 1.
c. [2 marks] What is the optimal investment level I2 for the economy in period 2?
d. [9 marks] Solve for optimal consumption levels for the economy in both periods.
e. [3 marks] What is the current account balance of the economy in Period 1? What are total savings in the economy in Period 1?
3) [18 marks] Sudden Stops and Current Account Reversals. Consider the data for a country in the table below. All parts to this question are worth 3 marks each.
a. Do you think it is optimal for this country to be running current account deficits (briefly explain your answer)?
b. What features of this data suggest that there is an increased likelihood of this country experiencing a “sudden stop” of capital inflows and a current account reversal (briefly explain your answer)?
c. What features of this data suggest a low likelihood of a “sudden stop” of capital inflows and a current account reversal (briefly explain your answer)?
d. If the country were to experience a current account reversal, do any features of the data suggest that the economic growth impact would be less substantial than normally occurs during such a reversal (briefly explain your answer)?
e. If the country were to experience a current account reversal, do any features of the data suggest that the economic growth impact would be more substantial than normally occurs during such a reversal (briefly explain your answer)?
f. Is there any other data you would like to observe to be able to better assess the likelihood of a sudden stop of capital inflows and a current account reversal (briefly explain your answer)?
|
|
Current Account Balance (% of GDP) |
Investment
(% of GDP) |
Productivity Index
(2009=100) |
Imports
(% of GDP) |
Exports
(% of GDP) |
Exchange Rate
(local currency units per USD) |
|
2009 |
-16.2 |
37.2 |
100.0 |
122 |
107 |
2.44 |
|
2010 |
-14.0 |
34.7 |
108.6 |
127 |
118 |
2.44 |
|
2011 |
-15.6 |
37.5 |
113.3 |
164 |
149 |
2.44 |
|
2012 |
-13.4 |
34.9 |
116.1 |
146 |
137 |
2.44 |
|
2013 |
-12.0 |
35.0 |
123.1 |
159 |
149 |
2.44 |
|
2014 |
-10.5 |
33.2 |
129.7 |
169 |
163 |
2.44 |
|
2015 |
-9.0 |
34.6 |
138.1 |
170 |
165 |
2.44 |
|
2016 |
-10.9 |
35.6 |
149.4 |
190 |
185 |
2.44 |
|
2017 |
-13.1 |
39.5 |
162.4 |
209 |
202 |
2.44 |
|
2018 |
-11.1 |
42.1 |
171.5 |
203 |
198 |
2.44 |
|
2019 |
-8.9 |
45.8 |
175.8 |
187 |
185 |
2.44 |
4) [19 marks] Exchange Rates. Report answers correct to at least 3 decimal places.
a. [2 marks] If the spot exchange rate SCHF/CNY = 0.15, then what is the spot exchange rate SCNY/CHF?
b. [2 marks] If the spot exchange rate SAUD/CAD = 1.05, and the spot exchange rate SCAD/USD = 1.25, what is the spot exchange rate SAUD/USD?
c. [2 marks] If the spot exchange rate SCNY/AUD = 4.75, and the spot exchange rate SUSD/AUD = 0.75, what is the spot exchange rate SCNY/USD?
d. [4 marks] Assume that you are an investor with 1,000 USD in an account and observe the following spot exchange rates: SGBP/USD = 0.75, SGBP/EUR = 0.8583, SUSD/EUR = 1.1452. Assuming that there are no transaction costs, what foreign exchange trading/investment strategy would you adopt?
e. [2 marks] Assume that (i) the one-year forward exchange rate
FCHF/EUR = 1.0505 (ii) the current spot exchange rate SCHF/EUR = 1.0859; and (iii) the one-year interest rate for EUR is i+ = 9.23%. What must one-year CHF interest rates be for Covered Interest Parity (CIP) to hold?
f. [3 marks] The current value of the spot exchange rate SAUD/CAD = 1.05. If the Canadian (CAD) inflation rate for the coming year will be 4% while the Australian inflation rate will be 2%, what value of the exchange rate SAUD/CAD 1 year from now would maintain Relative PPP?
g. [3 marks] Assume that consumers consume only 2 items: Rent; Food. In Germany, rent for 1 year is EUR 15,000 and food for 1 year is EUR 7,500. In Australia, rent for 1 year is AUD 20,000 and food for 1 year is AUD 7,500. If the spot exchange rate is SAUD/EUR = 1.616, what is the real exchange rate between Australia and Germany (treat Australia as the domestic country)? At what value of the nominal exchange rate SAUD/EUR would Absolute PPP hold?
2025-09-19