Describe how the
budget constraint of a household in a two-period model is affected by each of
the following changes. In Each Case do you think the household is better off
or worse off or is it ambiguous? If ambiguous what does the answer depend on?
A. Period 1 income is lowerB. The interest rate is higherC. Period 2 income is lower and he interest rate
is lowerSuppose that the exchange rate adjusts so that exchange rate parity holds. Suppose that the interest rate on a one year german bond is 7 percent and the interest rate on a one year US bond is 4 percent.A. Suppose that you expect the exchange rate in one year to be 1.2 dollars per Euro. What is the exchange rate today?B. Suppose the relative purchasing power parity holds and that the inflation rate in Germany is expected to be 2 percent over the next year. What is the expected inflation rate in the US?