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MSc Examinations AUGUST 2021-22

Advanced Macroeconomics 2: International Finance and Trade

1.       What is a country’s intertemporal budget constraint? How is it obtained when there is an infinite time horizon? How can it help us to understand current     account behaviour in an open economy?

2.       “If there is no uncertainty about aggregate world output, and if international    asset markets are complete, then in a two-country world where individual       countries’ outputs are risky, agents’ consumption levels will not be risky in the general equilibrium.” Discuss whether this statement is true, and, if so, why.

3.       With an infinite time horizon, what difference does it make to current account behaviour whether the only available asset is a riskless bond, or instead a    complete set of Arrow-Debreu securities?

4.       Consider a small open economy where agents live for two periods but the economy lasts forever. Suppose the government increases taxation on the young and uses the extra revenue to reduce taxation on the old, in every   period. Analyse the effect of this on macroeconomic variables.

5.       Why is the assumption of price stickiness essential to Dornbusch’s              explanation of exchange rate fluctuations? How robust is his finding that the exchange rate will react more than one-to-one, in percentage terms, to a     money supply shock?