The Model of A Sudden StopConsider a two-period, small, open economy. In period 1, households receive an endowment of 6units of tradable goods and 9 units of nontradable goods. In period 2, households receive 13.2 unitsof tradables and 9 units of nontradables (QT = 6, Q = 13.2, and QN = QN = 9). Households startperiod 1 with no assets or liabilities (B; = 0). The country enjoys free access to world financialmarkets, where the prevailing interest rate is 10 percent (r* = 0.1). Suppose that the household'spreferences are defined over consumption of tradable and nontradable goods in periods 1 and 2,and are described by the following utility function, In Cf + In CN + In C + In C", where C andCN denote, respectively, consumption of tradables and nontradables in period i = 1,2. Let pi andP2 denote the relative prices of nontradables in terms of tradables in periods 1 and 2, respectively.1.Solve for Cf, C, CN, CN, P1, and p2, and calculate the equilibrium levels of thecurrent account balance in periods 1 and 2 (CA, and CA2).2.Let us sketch a scenario like the one that took place during the Argentine debtcrisis of 2001 by assuming that because of fears that the country will not repay its debtsin period 2, foreign lenders increased the interest rate from 10 percent to 100 percent (now r* = 1.00). Calculate the equilibrium levels of the current account balance in periods 1 and2 (CA, and CA2).3.Consider the same situation as in Part 2 of this question. Suppose the InterAmerican Development Bank (IADB) decided to implement a transfer (gift) to Argentinato ameliorate the effects of the external crisis. Specifically, suppose that the IADB givesArgentina a transfer of F units of tradable goods in period 1. Use the utility function givenabove to compute the size of F that would make Argentineans as happy as in the no-crisisscenario.

An open economic system refers to a country that engages in worldwide exchange and financial…

Answered: quilibrium

Business

Economics

quilibrium

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

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