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sp05final - ECONOMICS 182 FINAL EXAM Spring 2005 Professor...

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ECONOMICS 182 FINAL EXAM Spring 2005 Professor M. Obstfeld Instructions: You have three hours to do the exam, which is worth a total of 100 points. Please make your answers as concise and relevant as possible. No credit is allowed for providing true but irrelevant information or reasoning. Part 1. Definitions. Briefly define all of the following terms or concepts. (24 points, 4 each) 1. Financial account credit. 2. Trilemma of monetary policy in the open economy. 3. Fisher effect. 4. Economic stability loss from joining a currency area. 5. “Institutions theory” of the world income distribution. 6. Purchasing power parity theory of exchange rate determination. Part 2. Short questions. Answer all of the following. (28 points, 7 each) 1. A country permanently and unexpectedly devalues its currency. What is the short run effect in a (classical, i.e. pre-Keynesian) model in which all prices are completely flexible? What is the short run effect in the AA-DD model? What is the long-run effect in the AA-DD model? 2. The "automatic stabilizers" argument for a floating exchange rate assumes that a currency depreciation cushions output and employment from negative export-demand shocks by lowering the price of domestic output relative to foreign. In many countries a large fraction of domestic
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