# Open Economy Finance Assignment And Analysis Help With Solution

## Open Economy Finance Assignment And Analysis Help With Solution

1. The following scenarios are fiction. Any relation to real life events is merely a coincidence.

In a fit of nationalistic zeal the new Chinese president declares war on Japan over some disputed islands in the East China Sea. Using the model of the large open economy determine what happens to U.S. savings, investment, trade balance, interest rates and exchange rates in the following scenarios. For each situation, be sure to draw the graphs that lead you to your answer. Assume each scenario occurs independently of the others.

a. Foreigners, fearing uncertainty in the Asian financial markets start buying U.S. government bonds.

Savings (up, down, no change):

Investment (up, down, no change):

trade balance (up, down, no change):

interest rates (up, down, no change):

exchange rates (up, down, no change):

b. In solidarity with Japan, the United States cuts off trade with China.

Savings (up, down, no change):

Investment (up, down, no change):

trade balance (up, down, no change):

interest rates (up, down, no change):

exchange rates (up, down, no change):

c. Expecting Chinese made goods to be scarce, U.S. firms seek resources to ramp up production of goods and services.

Savings (up, down, no change):

Investment (up, down, no change):

trade balance (up, down, no change):

interest rates (up, down, no change):

exchange rates (up, down, no change):

2. Two countries, Kabukistan and Raljon both have the production function:

Y = F(K,L) = (K ½ , L ½ )

Assume that neither country has population growth nor do they have any technological progress. Depreciation is 5% per year. The biggest difference between the two countries is that Kabukistan saves 10% of its income while Raljon saves 20%.

a. Find the per worker production function.

b. Using your answer from part a and the steady-state condition that investment equals depreciation find the steady-state level of capital per worker, consumption per worker, and income per worker for each country.

c. Show this steady state in a fully labeled graph.

3. In an effort to reduce the unemployment rate the Spanish parliament has passed a law severely limiting the ability of firms to hire foreign workers. If it is found that a business has more than 10% foreign workers, a hefty fine is levied against the business. This law increases the rate of job finding in Spain, while leaving the rate of job separation of citizens unchanged. Explain how this will affect the natural rate of unemployment in Spain. Do you think that the rate of job separation will remain unchanged? Why or why not?

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4. Compare two countries of your choosing, one rich and one poor. First identify the income per person in these two nations. Now, locate some data on these countries that might help explain the differences in income. Choose at least four categories of data and compare the two nations. (There are lots of places to look for this type of data. Try worldbank.org, the CIA fact book, or data.un.org just to name a few.) Make sure you note where your data comes from. Which of these do you think is most responsible for the differences in income (you must choose one, don’t say they’re all responsible). How would you test your theory?

5. You are examining some data for the economy of Kemboco, a small island nation. You turn to your notes on the Solow growth model and note that the data you have fits the model well. There is a steady state population growth of 1.8 percent per year, and technological growth also of 1.8 percent per year. Total output and total capital both grow at 3.6% per year. Capital’s share of output is 1/3.

You decide to separate output growth into three sources: capital, labor and total factor productivity. Using the growth-accounting equation, how much would you attribute to each source?

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