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[50 points, 5 points each question]
Explain briefly why the following statements are true or false.
Answers without explanation will be counted as wrong.
1) Ricardian Equivalence does not hold in a closed economy, given that domestic
agents cannot borrow or lend from abroad.
2) If Ricardian Equivalence holds, for given time pattern of government spending (G)
changes in the amount of outstanding public debt do not
affect the equilibrium real interest rate (provided that the intertemporal budget constraint of the government is
respected).
3) Consider an open economy where agents are borrowing constrained (are not allowed to borrow) and are currently
consuming all their disposable income (C1=Y1-T1). The government is financing all of its spending by raising taxes
(G1=T1). If the government decides to lower taxes, and therefore to finance part of its spending by issuing debt,
consumption in period 1 (C1) will rise.
4) At the current real interest rate, say
,
I am not a borrower nor a lender (so C1=Y1, C2=Y2).
If the interest rate rises to
I will become a lender [assume there is no government in this economy].
5) With perfect capital mobility with respect
to the rest of the world, preferences of domestic agents do not affect investment.
6) Countries which expect high government spending in the future will tend to
run Current Account surpluses - other things being equal.
7) Many developing countries are running current account deficits. This is consistent with permanent income theory.
8) If the production function is Cobb-Douglas, the return to capital in developing countries is higher than in
developed countries.
9) In order to compare living standards in Mexico and the U.S., all one has to
do is to compute the per capita GDP in both countries, expressed in U.S.$, and compare them. This would be
true only if all goods were tradables.
10) If all countries had a fixed exchange rate among each other (as during the Gold Standard),
inflation should be the same across countries.
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Marco Del Negro
2000-03-16