International macroe.. - Free

9.2. PRICING TO MARKET 305(b) Consider a temporary home government spending shock in whichG s = G 0 =0fors ≥ t + 1, andG t > 0. Show that the effect onthe depreciation and current account are,Ŝ t =(1 + θ)r²[r(1 + θ)+2θ + r(θ 2 − 1)]ĝt,ˆb =−²(1 − n)2θ(1 + r)r²[r(1 + θ)+2θ + r(θ 2 − 1)]ĝt.3. Consider the pricing-to-market model. Show that a permanent increasein home government spending leads to a short-run depreciationof the home currency and a balance of trade deÞcit for the home country.