国际财政THE NOTES ON INTERNATIONAL FINANCEfinal02

Final ExamEconomics 160B, Spring 2002You will have 120 minutes to complete this exam. It is divided into 130 points. Unless stated otherwise, assume the following: exchange rates are flexible, investment is exogenous, consumption is just a function of disposable income, and there is no risk premium in foreign exchange markets. Multiple Choice: (3 points each, 30 point total) Choose the best answer. Write answer on scantron.1) In the balance of payments, the capital account:a) should be the opposite in sign from the currentaccount.b) should be larger than the current account.c) includes the interest earned on foreign assets.d) includes unilateral transfers and internationalgiftse) both a and d.2) The “Twin Deficits” hypothesis deals with currentaccount deficits caused by which of the following:a) fall in private savingb) fall in investmentc) fall government spendingd) fall in taxese) all of the above3) According to the “Monetary Approach” toexchange rates, which of the following couldexplain the rise in the dollar/euro exchange rate in recent months:a) ris e in the real exchange rateb) rise in U.S. money supplyc) rise in U.S. outputd) fall in European money demande) fall in the real exchange rate4) Comparing a fixed exchange rate regime to aflexible exchange rate regime, a rise in government spending affects output ____ and affects thecurrent account ____.a)More, more.b)More, less.c)Less, more.d)Less, lesse)None of the above.5) Purchasing Power Parity tends to hold betterbetween countries that:a) are geographically far from each other.b) consume similar types of goods as each other.c) have more sticky prices.d) both b and ce) both a and c.6) Under the Gold Standard:a) Only one country pegged its currency to gold.b) There was a high degree of capital mobility.c) It was easier to maintain internal balance thanexternal balance.d) All countries held dollars as reserves.e) The Great Depression was made less severe.7) The Bretton Woods system allowed greaterflexibility than the Gold Standard in that it:a) allowed exchange rates to float.b) allowed national monetary policies to be used.c) Allowed exchange rate parities to be adjusted.d) reduced price stickiness.e) made loans to countries in temporary balance ofpayments surpluses.8) All of the following have been blamed forcontributing to the Asian Currency Crisis except:a)Poor banking regulation.b)Contagion.c)Crony capitalism.d)Excessive capital controls.e)IMF conditionality.9) The Latin American debt crisis of the mid-1980sa) involved debts primarily in the form of portfolioinvestmentb) created a new role for the InternationalMonetary Fundc) was worsened by the Brady plan of debtforgiveness.d) involved large debts by mainly oil-exportingcountriese) was solved by Bono10) If the Federal Reserve engages in foreign exchangeoperations to raise the value of the dollar, this willenter the balance of payments accounts as a:a) credit in the current account.b) debit in the current account.c) credit in the capital accountd) debit in the capital accounte) no effect on the balance of payments.Problem 1: (15 points, 5 points each part)Assume that covered and uncovered interest rate parity conditions and the relative and absolute versions of purchasing power parity hold. Suppose you read in the newspaper that the current spot exchange rate is 0.90 dollars per euro, and that the one-month forward rate is 0.92 dollars per euro.What can you infer regarding each of the following. In each case state which parity conditions(s) are needed.a) current U.S. nominal interest rate relative to that in Europe. (higher, lower, same, can’t tell)b) expected inflation rate in U.S. relative to that in Europe.c) current real interest rate in U.S. relative to that in EuropeProblem 2: (20 points, 10 points each part)Suppose you observe the following macroeconomic developments in Korea: a fall in output, apprec-iation in the val ue of the Korean won (fall in won/dollar), and a fall in the Korean current account.a) Which of the following shocks is most likely to explai n this: shock to tastes for Korean goods,money demand shock, shock to investment demand? Use the AA-DD-XX curve to explain why.b) If the Korean government wishes to restore output to its previous level before the shocks, and itwants the current account to be as close as possible to its previous level before the shocks, would you recommend monetary or fiscal policy in this case? What will happen to the Korean exchange rate (won/dollar). Show this in a graph of the AA-DD-XX curves.Problem 3: (20 points)Explain in words what exchange rate overshooting is, and how it is useful as an explanation for the surprising behavior of the U.S. dollar during the floating rate era since the collapse of the Bretton Woods system.For each of the following, state if it would tend to make exchange rate overshooting larger, smaller, ambiguous, or have no effect. Explain your reasoning in each case in 1-2 sentences.a) a greater degree of price stickiness in the short runb) money demand responds more to changes in outputc) money demand responds more to changes in the interest rated) the uncovered interest rate parity condition fails to hold because of a risk premium that does notchange over timeProblem 4: (20 points)Over the last decade, it seems that developing countries of one type or another have been the main targets of currency crises rather than major industrialized countries. What are the main economic features given in class as characteristic of most developing country economies? For each, discuss in a sentence or two how that feature relates to currency crises and might make a currency crisis more likely.Problem 5: (25 points)It has been proposed that Argentina adopt the U.S. dollar as its national currency as a way ofestablishing credibility for a stable price level. But dollarization may also imply significant costs for Argentina. List 4 of these costs, explaining each in a sentence. In a paragraph or two, explain what determines whether these costs are large or small.6/5/02。