ECO00028M:Advanced Macroeconomics 2: International Finance and Trade

Word limit:

The word limit per question is: 1200 words The word count does not include figures, graphs, the bibliography at the end of the question and equations. A complete bibliography is not required for items from the course’s reading list; they can be referred to using author(s) (year) only

Instructions for Candidates:

Answer ANY TWO questions

If you answer more than two questions, only the first two answers in the order they appear in the script, will be marked.

Any answers you do not wish to be included in the marking, must be clearly crossed out

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. 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?

3. What are the implications of the population of an economy having an overlapping generations structure for the way the economy responds to fiscal deficits? Comment on whether these theoretical implications are supported by empirical evidence.

4. Why is the distinction between the real exchange rate and the nominal exchange rate important in the ‘overshooting’ model of the exchange rate? Explain how these variables behave in the short run and the long run in this theory.

5. What effect does a permanent increase in the foreign money supply have on home output, in the Obstfeld-Rogoff two-country model? Discuss the role of the exchange rate in causing this outcome