Assume a
2-period, 2-country world with two large open economies: Ambria and Petunia.
Ambria has a current account deficit and Petunia has a current account surplus.
Using a model discussed in

Topic 7 answer the following questions:

a) If
Ambria and Petunia decide to introduce capital controls what would happen to
their

current accounts? What would happen to
the interest rates?

b) Assume
that there is an anticipated decrease in the future productivity in Petunia.
Analyse

how the
equilibrium interest rate and current accounts in Ambria and Petunia would be

affected by
this decrease.Hint:analyse how
saving and investment schedules be affected in

Petunia.

c) Now
assume that Ambrian government decides to increase its spending in the first
period.

How would
this affect the equilibrium interest rate and current accounts in Ambria and

Petunia?
Does equilibrium investment get higher or lower in Ambria?

d) Finally,
assume that the governments of two countries decide to eliminate external

imbalances
using fiscal policies. At the same time they would like to maintain the

equilibrium interest rate unchanged. What
kind of policies should these government use?

Attachments:

Question-1.docx

Hopper1997.pdf

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