Econ 4810 Final Study Sheet-1

Econ 4810 Final Study Sheet-1 - Econ 4810 Final Study Sheet...

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Econ 4810 Final Study Sheet 1. A. Can a large depreciation have a positive effect on the economy? YES Can increase exports = b/c they are cheaper over seas due to the depreciation. = this stimulates the economy. Helps to correct current account balances. ER increase => currency devalues => exports increase = GDP or Y to increase . Ex. Argentina – after the crisis hit in 2002 the devalued currency gave them a competitive advantage in the global market and increased their exports. This helped them with their recovery from their crises. B. Can it have a negative effect on the economy? YES IF the depreciation happens too quickly and there is a lot of borrowing in $ it will cause a recession It is more difficult to pay debt. Foreign debt increase => GDP or Y to decrease C. Explain what factor makes the difference. Developed Countries – borrow in $ and trade in $ Developing Countries – borrow in foreign money but trade in local money o This increases debt obligations o Leads to recession and higher inflation ** This is especially true if foreign goods are priced to pass on the depression effect called “Pass Through” Fist Generation Crisis Model 2. In the fist generation model of crisis the root cause of the crisis is the monetization of budget deficits, i.e. printing money of finance budget deficits. Explain how that leads to devaluation The over supply of money in the market leads to its devaluation. This also creates inflation. 3. A. What are the warning signs of this type of a crisis? Leading indicators 1st generation: large budget deficit (5to 6%) large current account deficit (5 to 6% for 2 to 3 years) rapid money growth (5 to 6%) high inflation (5 to 6%, 10% if it is pegged. If inflation is higher that the country you are pegged to.)
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* fiscal deficits financed by a large money supply B. What are the appropriate policy responses to this type of a crisis? Policy responses
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This note was uploaded on 10/20/2008 for the course ECON 4810 taught by Professor Valev during the Spring '08 term at Georgia State University, Atlanta.

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Econ 4810 Final Study Sheet-1 - Econ 4810 Final Study Sheet...

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