finalb_sol - Pierre-Olivier Gourinchas Department of...

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Pierre-Olivier Gourinchas Econ182 Department of Economics International Monetary Economics UC Berkeley Fall 2004 Final examination SOLUTION SHEET WRITE YOUR ANSWERS TO QUESTION 1 ON PAGES 2-5. 1. [30 points, 5 each] Choose six out of the eight following True, False, Uncertain ques- tions . Explain brie f y your answers, and cite the relevant theories, when applicable. (a) A current account de F cit requires a depreciation of the domestic currency in order to stimulate exports and limit imports. FALSE. It is not required. There are three equivalent interpretations of a current account de f cit: S-I, X-M+NFP and Y-A. Eliminating a current account de f cit can be achieved via expenditure reducing policies. (b) Countries with high domestic in f ation rates over long periods of time experience a high rate of depreciation of their nominal exchange rate relative to the currency of countries with lower in f ation rates. TRUE. Relative PPP: π = e/e + π . (c) An increase in domestic nominal interest rates is always associated with a nominal appreciation of the domestic currency. FALSE: an increase in domestic nominal interest rates can be associated with a nominal appreciation when there is a permanent change in the level of money, or with a nominal depreciation when there is an increase in the rate of growth of money. (d) If the price of oil were to temporary fall to $15 a barrel, we should expect the U.S. and other oil dependent countries to run a smaller current account de F cit. TRUE: Intertemporal Approach to the Current Account. This is a temporary favorable shock for oil dependent countries. Hence they should save more and run a smaller current account de f cit. (e) According to the World Bank, GDP per capita in 2002 was close to $1,000 in China and $36,000 in the U.S. [This is a fact; do not discuss]. This implies that the typical U.S. person has about 36 times the purchasing power of a typical Chinese person. FALSE. the purchasing power needs to be computed on a PPP basis. China’s PPP income is much larger, relative to the US (f) Under the Bretton Wood 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. UNCERTAIN/FALSE : It is true that the country at the center is free to set its monetary policy at will and countries at the periphery have to adjust. However, in the BW system, the parity between Gold and US dollar needs to be maintained. If the US runs a monetary policy that is too expansionary (as they did), then, other central banks might run against the dollar and ask for gold (as it happened). So even US monetary policy is not unconstrained. But this constraint is only felt in the longer run (Tri n problem). For thirty years, the US was able to set monetary policy with an eye mostly to internal balance. (g) Currency crises arise when
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This note was uploaded on 08/01/2008 for the course ECON 182 taught by Professor Kasa during the Spring '08 term at University of California, Berkeley.

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finalb_sol - Pierre-Olivier Gourinchas Department of...

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