Problem Set 2
1 The Balance of Payments
1.The largest US’s positive annual current account surplus since 1960 was 18.117 billion, and the year was 1975.
2. The largest US’s negative annual current account surplus since 1960 was 806.726 billion, and the year was 2006.
3. The flow of current account balances contribute about 6.715710 trillion dollars to the US’ net foreign debt by the end of 2013.
Difference: Using NIIP method not only includes the transaction (imports and exports) between US and other countries, it also add into other factors, like the change of price, exchange rates and volume and valuation.
5. Fraction of US’ overseas assets in direct and portfolio investment were made up of equity at the end of 2013:
Fraction of US’ foreign direct and portfolio investment were made up of equity at the end of 2013: =0.4829
6. The correlation between the US’ annual net government lending and the country’s current account balance over the period 1960 to 2013 is 0.6186. The positive relationship between current account and government budget implies when the government budget is high and it has more savings, the current account will correspondingly higher too. Otherwise, the current account will become lower.
2 Gains from Financial Globalisation
The highest, constant and annual consumption level that Japanese households could afford for 2010 and all subsequent years is 4.01 trillion
Japanese highest feasible, constant consumption is 3960 billion.
Current Account 2011= TB2011+NFIA+NUT
External Wealth for Japan in 2011==-100+1000=900 billion
Current Account 2012=TB2012+NFIA+NUT=-9+0.01*900=0
Therefore the Current Account for Japan in 2011 and 2012 are -100 billion and 0 billion
How Japan’s Balance of Payments balances in 2011:
-110 billion + 100 billion=0
How Japan’s Balance of Payments balances in 2012:
-9 billion+9 billion=0
Government needs to raise taxes 5 billion in 2012 and subsequent years under this scenario
GNE2011=4060 billion=4.06 trillion
Trade Balance =GDP-GNE=3850-4060=-210 billion
I would recommend the government to adopt this plan since GNE will equals to 4.06 trillion is much bigger than the previous 3.96 trillion, so it raises consumption effectively.
The household’s optimal consumption in 2011 is 3.92 trillion in this case.
6. The answer won’t change, since to tax now or rolling the tax forever, the present value will always be 500 billion.
3 The IS-LM Model
1. An increase in interest rates will decrease the demand for goods.
As shown from graph above, as interest rate goes up, the output income will go down. When the interest rate goes up, firms are not willing to engage in more investment project since the opportunity costs are higher. Hold other elements constant, it will directly decrease D at any level of output Y.
2. LM Curve
When the nominal interest rate goes up, the output in domestic financial markets will also go up.
Because of , and in the short run P is sticky. In the money market equilibrium, if real