ps4 - Department of Economics University of California...

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Department of Economics University of California, Berkeley Spring 2006 Economics 182 Problem Set 4 Due in class on Thursday, April 6. To be handed at the beginning of lecture . Please write your name, GSI name and section time in your problem set. Problem 1 : True, False, Uncertain Explain your answers briefly and cite relevant theories. (a) Balance-of-payments crises are the fault of the government. Irresponsible politi- cians routinely neglect external constraints and engage in reckless policies that undermine the commitment to fix the currency’s value. (b) Under the Bretton Woods system, the country at the center (the U.S.) can set its monetary policy at will. Other countries will have to adjust their monetary conditions. (c) Governments with economies in deficit usually face more intense pressures to restore external balance than do surplus countries. As a result, the external balance problem of a deficit country is more severe than that of a surplus country. (d) Under a fixed exchange rate regime, a country can generally attain internal and external balance using only fiscal policy. Problem 2: The Gold Standard (a) In spite of the flaws of the pre-1914 gold standard, exchange rates crises were rare for major European powers, the U.S., and Japan. In contrast, such changes became quite frequent in the interwar period. Can you think of reasons for this contrast? (b) Under a gold standard, countries may adopt excessively contractionary monetary policies as all countries compete for a larger share of the limited supply of world gold reserves. Can the same problem arise under a reserve currency standard when bonds denominated in different currencies are all perfect substitutes?
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