1. How is the ‘fundamental equation’ for the current account derived? How
successful is it at explaining real-world current account behaviour?
2. If the only available internationally-traded assets are riskless bonds and
equity, does this necessarily mean that the global resource allocation is
Pareto-inefficient? What does empirical evidence suggest about whether
there is efficient international risk-sharing?
3. Under what conditions will an increase in government debt reduce aggregate
consumption in the long run, in a small open economy? Support your
arguments by careful analysis of a formal model.
4. In Dornbusch’s model of exchange rate determination, explain why the
dynamics have the ‘saddlepoint stability’ property. How is this relevant to the
result that the exchange rate ‘overshoots’, following a money supply change?
5. What is the role of assuming that utility over different types of goods has a
constant-elasticity-of-substitution (‘CES’) form, in Obstfeld and Rogoff’s twocountry model? How do the macroeconomic results depend on the magnitude
of the elasticity of substitution?