<p>Econ 4020(001), Fall 2008</p><p>Homework 2</p><p>Due on September 30 (Tuesday)</p><p>Complete the following questions:</p><p>1. Solve the following problem: Mankiw, Macroeconomics, Page 147, “Problems and Applications,” Problem #2. Where “є” stands for exchange rate. 2. Go to the following US government website: www.bea.gov. Click on “Gross Domestic Product.” Look for “GDP and the National Income and Product Account (NIPA) Historical Tables.” Click on “List of All NIPA Tables.” In Table 1.1.5, line 1, find the Gross Domestic Product in 2007 (use the annual series). The go to Table 4.1, line 29, find the US current account deficit (a broad definition of trade deficit) in 2007 (use the annual series). What was the ratio of the current account deficit to GDP for the US in 2007? 3. Now go back to the homepage of www.bea.gov, click on “international investment position.” Under “International Investment Position,” look for “Year end positions, 1976-2007.” Open the excel file, in line 1, find the US net international investment position in 2007. It is a negative number. That means the US is a net debtor to the rest of the world. Calculate the ratio of the US net foreign debt (same as the net international investment position) to the US GDP in 2007. Note that the net international investment position is stated in million dollars, while GDP is stated in billion dollars. 4. Current account deficit represents a country’s borrowing from the rest of the world. A country’s long-term potential debt to GDP ratio can be calculated as follows: Long-term potential debt to GDP ratio = (Current account deficit to GDP ratio) / Long-term nominal GDP growth rate. Assume the US long-term nominal GDP growth rate is 5% (assume long-term real GDP growth rate being 3% and inflation rate being 2%). Based on your answer to question 2, if the current US deficit to GDP ratio is maintained indefinitely, what will be the long- term potential debt to GDP ratio for the US economy?</p>