Applied International Macroeconomics

APPLIED INTERNATIONAL MACROECONOMICS

Spring 2017: Practice Problems 15

Due Monday, April 24, at the beginning of class

1. The following paragraph has 145 words. Communicate the same key points in 100 words or less. Be sure to use good grammar, punctuation, and spelling.

Our data began from Jan 1990, when the Soviet Union collapsed and Poland started to shift from communist state into a market economy. Poland inflation over 10k percent higher than US inflation in 1990, constrained by its peg to USD, Poland’s competitiveness declined dramatically (32%) till 1991 year end. Consequently, net exports dropped to a trade deficit, which was partially explained by other political instabilities following the fell of the Soviet Union. In May 1991, Poland devalued Zloty in response to the appreciation of USD. Zloty was then pegged to a basket of international currencies through to the 1991 year end. Poland’s competitiveness didn't change much but net export was picked up during these five months. After 1993, competitiveness further decreased till May 1995. This consists with the Dutch Disease logic, the continuous soar in the price of Poland’s big export commodity brought down competitiveness.

At the end of the problem set you will find an example of a poor paragraph and two improved versions.

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1. This question asks you to evaluate the sustainability of Italy’s government debt. In 2015, Italy’s government debt was €2.8 trillion or 132% of GDP. (For a smile, consult the “World Debt Clock” at http://www.nationaldebtclocks.org/debtclock/italy)

[pic 1]

1. Does the chart show stock figures or flow figures?

1. Why did government debt rise so fast around the financial crisis?

1. Trading Economics reports Italy’s government deficit at 2.7% of GDP in 2015 (see below). Are these stock figures or flow figures?

[pic 2]

1. In 2012 Prime Minister Monte insisted that the deficit had to remain below 3%. Suppose that was required for sustainability. Implicitly, what average annual growth rate would make a 3% deficit sustainable for Italy over the long run? Write out the formula you need and show your work.

1. Compare the growth rate you just calculated to Italy’s annual growth since 2000, shown below. Is your estimated growth rate likely to be realized?  If not, is 3% a sustainable deficit? Provide a more realistic estimate of the maximum sustainable deficit.

[pic 3]

1. Italian 10-year government bonds are currently paying roughly 1.1%. Assume that Italy’s inflation is about zero. What is the smallest sustainable level for Italy’s primary deficit, as a percent of GDP, assuming the implicit growth forecast you calculated above? Would non-interest spending be greater or less than government revenues? Write out the formula you used for this calculation and show your work.

1. What is the smallest sustainable value for Italy’s primary deficit, assuming long-run sustainable growth of 0.5%? Would non-interest spending be greater or less than government revenues?

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Editing examples