ECOS3029: Practice Midterm
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ECOS3029: Practice Midterm. Marked out of 70.
1) [9 marks] National Accounts Exercise. Suppose that the value of national account aggregates in China for a year are:
Exports of goods and services: ¥249;
Imports of goods and services: ¥160;
Private consumption expenditure: ¥300;
Government consumption expenditure: ¥100;
Government tax revenues: ¥149;
Investment: ¥200;
Income received from foreign investments: ¥49;
Income paid to foreign investors: ¥50.
a) [3 marks] If the above list of transactions is complete, what is the Trade Balance for China as a % of Chinese Gross National Income (GNI), correct to at least 1 decimal place?
b) [3 marks] What is the Current Account Balance for China as a % of Chinese GNI, correct to at least 1 decimal place?
c) [3 marks] What is the value of total savings in the economy?
2) [25 marks] Intertemporal Model. Assume that a small open economy runs for 2 periods and has production, investment, and a representative consumer with:
• Lifetime utility function: Ul = ln(c1 ) + Fln (c2 )
• Production function: Yt = Kt0. 75 where the initial capital stock is K1 = 500
• Capital Stock in Period 2: K2 = K1 + I1 , where I1 is period‐ 1 investment
• Access to international credit markets at an interest rate 
=0.149.
• F(1+
)=1.
• Initial Net International Investment Position: B1 = 0.
a. [3 marks] Write down the maximization problem for the representative consumer
b. [8 marks] Solve for the optimal investment level I1 for the economy in period 1.
c. [2 marks] What is the optimal investment level I2 for the economy in period 2?
d. [9 marks] Solve for optimal consumption levels for the economy in both periods.
e. [3 marks] What is the current account balance of the economy in Period 1? What are total savings in the economy in Period 1?
3) [18 marks] Sudden Stops and Current Account Reversals. Consider the data for a country in the table below. All parts to this question are worth 3 marks each.
|
Current |
Investment |
Productivity |
Imports |
Exports |
Exchange Rate |
|
|
Account Balance |
|
Index |
|
|
|
|
|
(% of |
|
|
(% of |
(% of |
(local currency |
|
|
GDP) |
(% of GDP) |
(2009=100) |
GDP) |
GDP) |
units per USD) |
|
|
2009 |
‐ 16.2 |
37.2 |
100.0 |
122 |
107 |
2.44 |
|
2010 |
‐ 14.0 |
34.7 |
108.6 |
127 |
118 |
2.44 |
|
2011 |
‐ 15.6 |
37.5 |
113.3 |
164 |
149 |
2.44 |
|
2012 |
‐ 13.4 |
34.9 |
116.1 |
146 |
137 |
2.44 |
|
2013 |
‐ 12.0 |
35.0 |
123.1 |
159 |
149 |
2.44 |
|
2014 |
‐ 10.5 |
33.2 |
129.7 |
169 |
163 |
2.44 |
|
2015 |
‐9.0 |
34.6 |
138.1 |
170 |
165 |
2.44 |
|
2016 |
‐ 10.9 |
35.6 |
149.4 |
190 |
185 |
2.44 |
|
2017 |
‐ 13.1 |
39.5 |
162.4 |
209 |
202 |
2.44 |
|
2018 |
‐ 11.1 |
42.1 |
171.5 |
203 |
198 |
2.44 |
|
2019 |
‐8.9 |
45.8 |
175.8 |
187 |
185 |
2.44 |
a. Do you think it is optimal for this country to be running current account deficits (briefly explain your answer)?
b. What features of this data suggest that there is an increased likelihood of this country experiencing a “sudden stop” of capital inflows and a current account reversal (briefly explain your answer)?
c. What features of this data suggest a low likelihood of a “sudden stop” of capital inflows and a current account reversal (briefly explain your answer)?
|
Current |
Investment |
Productivity |
Imports |
Exports |
Exchange Rate |
|
|
Account Balance |
|
Index |
|
|
|
|
|
(% of |
|
|
(% of |
(% of |
(local currency |
|
|
GDP) |
(% of GDP) |
(2009=100) |
GDP) |
GDP) |
units per USD) |
|
|
2009 |
‐ 16.2 |
37.2 |
100.0 |
122 |
107 |
2.44 |
|
2010 |
‐ 14.0 |
34.7 |
108.6 |
127 |
118 |
2.44 |
|
2011 |
‐ 15.6 |
37.5 |
113.3 |
164 |
149 |
2.44 |
|
2012 |
‐ 13.4 |
34.9 |
116.1 |
146 |
137 |
2.44 |
|
2013 |
‐ 12.0 |
35.0 |
123.1 |
159 |
149 |
2.44 |
|
2014 |
‐ 10.5 |
33.2 |
129.7 |
|
||
2022-11-16