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For the following questions identify the Balance Sheet Accounts, the dollar amount, whether the action is an Increase or a Decrease to that Balance Sheet Account and whether it is a Source or a Use of Cash. For example: a company collects $10k in Accounts Receivable: Account Amount Increase or Decrease Source or Use of Cash Accounts Receivable $10 Decrease Use Cash $10 Increase Source Company buys $25m of Inventory with Cash it has in the Bank. Account Amount Increase or Decrease Source or Use of Cash Inventory $25m Increase Use Cash $25m Decrease Source Company sells $25m in Inventory at Cost and pays its Vendors $15m. Account Amount Increase or Decrease Source or Use of Cash Cash $15m Increase Use Accounts Receivable $10m Increase N/A Inventory $25m Decrease Source Company borrows $50m to fund $50m increase in Account Receivables. Account Amount Increase or Decrease Source or Use of Cash Accounts Receivable $50m Increase N/A Loan $50m Increase N/A Company raises $50m of new Equity and Repays Debt of $40m. Account Amount Increase or Decrease Source or Use of Cash Cash $10m Decrease Source Loan (Debt) $40m Increase Use Equity $50m Decrease Source $70m of Accounts Receivables are Collected with proceeds repaying $50m of Debt. Account Amount Increase or Decrease Source or Use of Cash Accounts Receivable $70m Decrease Source Loan (Debt) $50m Increase Use Cash $20m Decrease Source Company makes $40m with $10m of Depreciation and $5m of Amortization and Repays Debt of $55m. Account Amount Increase or Decrease Source or Use of Cash Retained Earnings $40m Decrease Source Depreciation $10m Decrease Source Loan (Debt) $55m Increase Use Amortization $5m Decrease Source Inventory with a Book Value of $30m is Sold for $40m on 60 Day Term. Account Amount Increase or Decrease Source or Use of Cash Inventory $30m Decrease N/A Accounts Receivable $40m Increase N/A Company Collects $70m of Accounts Receivables and Reduces Debt by $50m. Account Amount Increase or Decrease Source or Use of Cash Accounts Receivable $70m Decrease Source Loan (Debt) $50m Decrease Use Cash $20m Decrease Source Company Makes $60m after Tax (Depreciation of $10m) and uses all of its proceeds to Purchase Equipment. Account Amount Increase or Decrease Source or Use of Cash Retained Earnings $50m Decrease Source Equipment $60m Increase Use Depreciation $10m Decrease Source
Akash M.
Consider a two-period two-country endowment economy. Households have preferences described by the utility function ln(CU1) + ln(CU2) where CU1 and CU2 denote the consumption in period 1 and period 2. Suppose that households receive exogenous endowments of goods given by QU1 = 10, QU2 = 15 in periods 1 and 2, respectively. Europeans have identical preferences, given by ln(CE1) + ln(CE2), where CE1 and CE2 denote the consumption in period 1 and period 2. Suppose that households receive exogenous endowments of goods given by QE1 = 10, QE2 = 15 in periods 1 and 2, respectively. Assume further that the endowments are non-storable, that the U.S. and Europe are of equal size, and that there is free capital mobility between the two economies. The United States starts period 1 with a zero net foreign asset position. 1. Compute the equilibrium levels of world interest rate, consumption, the trade balance, and the current account in periods 1 and 2 in the U.S. 2. Suppose that a contraction originates in the United States. The U.S. endowment falls from 10 to 8 in the first period and is expected to continue to fall to 6 in the second period. The endowments in Europe remain unchanged each period. Calculate again the equilibrium interest rate and current accounts in the U.S. and Europe in period 1. 3. Now instead suppose that Europe experiences a favorable shock that temporarily increases the European endowment from 10 to 15 in the first period. The second period is still 15. There is no change in the U.S. endowment (QU1 = 10, QU2 = 15). Calculate again the equilibrium interest rate and the two current accounts in period 1. 4. Show on a current account-world interest rate plot qualitatively how a domestic shock can increase the current deficit for the U.S. and how an external shock can increase the current account deficit for the U.S. Point out the difference in the equilibrium world interest rates.
Exercise 2. Consider a small open economy with 2 periods and one non-storable good. Households receive endowments Y1, Y2 in periods 1 and 2, respectively, and are taxed (lump-sum) by the government. Let T1, T2 be the lump sum taxes paid by households in periods 1 and 2, respectively. Households cannot borrow or save. Governments can access credit markets and can decide in t = 2 to repay or default (entirely) on its debt. Let D1 be the total face value of the bonds issued by the government in t = 1, to be paid in t = 2, and q1 be the price of a bond of one dollar of face value. International credit markets are populated by risk-neutral foreign investors that can access borrowing/lending at the international interest rate r. The government is benevolent and chooses debt repayment to maximize consumption in t = 2 for the households. If the government defaults, households receive a fixed endowment of Y2 = Y2^d = 2. If the government repays households receive an endowment Y2 = Y2^r. From the perspective of period 1, Y2^r is a random variable Y2 uniformly distributed over [3, 5]. A random variable Y is uniformly distributed over [a, b] if and only if Pr(Y <= y) = (y - a) / (b - a) for y in [a, b]. (a) Write down the budget constraints for the households and the government in t = 1. (b) Write down the budget constraints for the households and the government in t = 2 if the government decides to repay. Write down the budget constraints for the households and the government in t = 2 if the government decides to default. Suppose the equilibrium level of debt in t = 1 is given by D1 = 1. (c) Compute the probability of default and the price of debt in t = 1, q1 and the value of debt in t = 1, q1D1. Now suppose that in t = 1, after debt is chosen there is an increase in uncertainty about Y2^r. Particularly, everybody finds out that Y2 is uniformly distributed over [2, 6]. Note that the average of the endowment does not change but the variance increases. (d) Compute the new probability of default and the price of debt in t = 1, q1 and the value of debt in t = 1, q1D1. Is your answer different from (c)? If so, explain why.
Adi S.
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