ECOS3007 International Macroeconomics
Creation date:2024-05-16 17:34:58
International Macroeconomics
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
ECOS3007 International Macroeconomics
Time Allowed: 2 Hours
Reading Time: 10 Mins
Total pages: 5 (including the cover page)
Instructions
1. This is an open book exam. There are 4 questions with 100 total points. The question
le should consist of 5 pages, including the cover page.
2. Answer ALL questions. Each question will have a certain number of points awarded.
3. Handwrite or type your answers clearly on plain white papers, A4 size. Please read the
questions carefully before writing your answer. You may combine mathematics, hand-
drawn
gures or graphs, and explanations in words. Write neatly and concisely. No
bonus point will be awarded for extra answer answer the questions just as needed,
but with su¢ cient analysis to justify your answer.
4. You have 120 minutes (2 hours) to write your responses and an extra 30 minutes
to scan/photograph and upload your pages as ONE FILE in PDF, DOC, or JPG
(image) format. PleaseWRITE YOUR STUDENT ID NUMBER on the top of
the front (
rst) page of your submission
le. No submissions will be accepted
after the speci
ed end time of the upload time. Submissions sent by email
will NOT be accepted at any time.
Good luck!
1
1. [30 points] Indicate whether each of the following statements is true, false, or uncer-
tain. Provide an explanation (using words, diagram, etc.) for your answer. Marks are
awarded for explanation only. A correct true, false, or uncertain designation with an
incorrect explanation will receive zero mark.
(a) The 2007-2008 global
nancial crisis would have had a larger negative impact on
the Australian economy if (i) Australian banks were large holders of U.S. asset-
backed securities, and (ii) the Reserve Bank of Australia were operating under a
(fully-credible)
xed exchange regime, with the Australian dollar pegged to the
US dollar. [10 points]
(b) In the standard real business cycle (RBC) model discussed in class, one of the
householdsoptimality condition is
(1Nt) =
1
ct
wt
where Nt is amount of labor supply, ct is consumption, wt is real wage, and is
a scale parameter. Under the above condition, given wage wt, households could
increase their consumption, and hence, their utility, by increasing their labor
supply. [10 points]
(c) Within the extended DD-AA model with pandemic shocks discussed in class, the
e¤ectiveness of a given
scal policy stimulus in response to a negative output
shock ("y < 0) would be lower if (i) the savings rate s is lower, and (ii) the
responsiveness of current account on exchange rate uctuations (the parameter
a) is higher. [10 points]
2
2. [15 points] The following impulse-response
gure depicts the e¤ect of an expan-
sionary monetary policy within a quantitative open-economy DSGE model (under a
oating exchange rate regime). Discuss how and why these impulse responses are
consistent/inconsistent with the e¤ect of an expansionary monetary policy (increase in
money supply M s) under the standard qualitative DD-AA model, discussed in Topics
2-5 in ECOS3007?
Figure 1:
%
d
ev
%
d
ev
%
d
ev
%
d
ev
3
3. [28 points] Consider the extended DD-AA model with credit markets discussed in
Topic 7. The following equations for the domestic (U.S.) economy apply
Y = C + I + G+ CA
C C(Y T;Rd; "h)
I I(Rb)
CA = CA(E; Y T; Y )
M s
P
= L(R; Y )
R = R +
Ee E
E
The deposit and loan rates evolve as
Rd = (R)
Rb = 1(R
d) + 2(K
B)
NOTE: these equations, the de
nition of variables, and all the underlying assumptions
(e.g. @ =@R > 0) are identical to those discussed in class (unless otherwise noti
ed).
Assume a "short-run" analysis throughout.
(a) Using the DD-AA diagram and in words, describe the e¤ects of a credit crunch
scenario, i.e. a sudden destruction of bank capital (decrease in KB). Assume
that there is no monetary and
scal policy response (M s and G stay constant).
[8 points]
(b) Describe how, in theory, monetary policy could be used to prevent a decrease in
output Y (i.e. to maintain the same level of output as before the credit crunch).
What happen to C, I, E, CA, R, Rd, and Rb after this monetary policy response?
[12 points]
Now, lets suppose that when the credit crunch occurs, the economy was already
in a liquidity trap where the nominal policy rate was at its zero lower bound
(R = 0).
(c) Within the model above, describe how forward guidance, i.e. central banks in-
uence on expected exchange rate Ee, could be used to prevent a decrease in
Y ? What happen to C, I, E, CA, R, Rd, and Rb after this (successful) forward
guidance, compared to your answer in part (b)? [8 points]
4
4. [27 points] Consider the DD-AA model with pandemic shocks discussed in Topic 8:
Y = C + I +G+ CA+ h"y
C = (1 s)Y
CA = aE mY
Ms
P
= L(R; Y )
R = R +
Ee E
E
+ "R
The de
nition of variables and all the underlying assumptions are identical to those
discussed in class (unless otherwise noti
ed). Assume a "short-run" analysis through-
out. Suppose that the pandemic shocks are represented by a negative output shock
("y < 0) AND a positive exchange rate risk-premium shock ("R > 0) to the economy.
(a) Assuming that there is no monetary and
scal policy response, describe the e¤ects
of these pandemic shocks to the economy (using the DD-AA diagram or/and in
words). Note: assume that the combined e¤ect is such that there is a decrease in
output (Y #). [7 points]
(b) Now suppose that the central bank is operating under a
xed exchange rate
regime the
xed, constant exchange rate target level is E = E. Assume that
the regime is always credible, i.e. Ee = E = E, irrespective of the pandemic
shocks, and the foreign central bank keeps their nominal policy rate constant (R
is unchanged, even with the pandemic shocks). Under this regime, describe the
e¤ects of the pandemic shocks (note: still assume that there is no
scal policy
response). Does the decrease in output larger or smaller compared to that in part
(a)? Explain why. [12 points]
(c) If an expansionary
scal policy, i.e. an increase in G, is used to prop up the
economy, is the necessary amount of
scal stimulus larger or smaller under a
credible
xed exchange rate regime (compared to that under a oating regime)?
Justify your answer. [8 points]