My macro final

1. The pessimists commonly argue that the large U.S. trade and budget deficits eventually will require a big fall in the dollar, higher real interest rates, and a general loss of confidence in dollar-denominated assets. We all know that g > r would stop this problem in its tracks. But let us say that g is not big enough relative to r. What other non-pessimistic scenarios can you outline? How valid are they?

2. What is the difference between covered and uncovered interest parity? Which are assumed by the traditional Dornbusch model of exchange rate overshooting? None, just one, or both? How do the observed failures of the expectations theory of the term structure affect the Dornbusch model? 

3. How will the aging baby boom generation affect the following and why? Savings rates, interest rates (real, nominal, short and long term), Fed policy, inflation, and investment.

4. Targeting nominal gdp involves targeting M x V, or Money times Velocity. Do open economy considerations make this a better or worse idea? Make sure your assumptions are clearly stated.

5. Write your own exam question and answer it, do not use open economy macro as your major topic since three of the questions already cover that. The quality of the question matters as much as the quality of the answer.

Some people did very well.  #2 and #4 gave people the biggest problems.


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