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ECN6620, International Money and Finance SPECIMEN

2020-21

International Money and Finance: Coursework SPECIMEN

Consider a small open economy receiving an endowment of tradable goods while producing nontradable goods. Production of nontradable is given by   and profit are given by , where  is the price of nontradables in terms of tradables. The law of one price holds for tradables, implying , since the foreign price level is normalized to 1. Preferences of the representative household are described by . The budget constraints are , for . All other variables have standard interpretation.

 

Question 1. Derive the supply and demand schedules for nontradables; provide their economic interpretation. [max 400 words]

 

Question 2. Use your results to explain the economy-wide negative effects of the sudden stop. [max 800 words]

Question 3. Show graphically and explain what type of policy intervention can mitigate the negative effects of a sudden stop. [max 800 words]