Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question

Transcribed Image Text:The Model of A Sudden Stop
Consider a two-period, small, open economy. In period 1, households receive an endowment of 6
units of tradable goods and 9 units of nontradable goods. In period 2, households receive 13.2 units
of tradables and 9 units of nontradables (QT = 6, Q = 13.2, and QN = QN = 9). Households start
period 1 with no assets or liabilities (B; = 0). The country enjoys free access to world financial
markets, where the prevailing interest rate is 10 percent (r* = 0.1). Suppose that the household's
preferences 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 and
CN denote, respectively, consumption of tradables and nontradables in period i = 1,2. Let pi and
P2 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 the
current 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 debt
crisis of 2001 by assuming that because of fears that the country will not repay its debts
in period 2, foreign lenders increased the interest rate from 10 percent to 100 percent (now

Transcribed Image Text:r* = 1.00). Calculate the equilibrium levels of the current account balance in periods 1 and
2 (CA, and CA2).
3.
Consider the same situation as in Part 2 of this question. Suppose the Inter
American Development Bank (IADB) decided to implement a transfer (gift) to Argentina
to ameliorate the effects of the external crisis. Specifically, suppose that the IADB gives
Argentina a transfer of F units of tradable goods in period 1. Use the utility function given
above to compute the size of F that would make Argentineans as happy as in the no-crisis
scenario.
Expert Solution

This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps with 32 images

Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you


Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON

Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON


Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON

Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON

Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning

Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning

Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education