midterm3 - Economics/Finance 431/531 Ruxandra Prodan Test 3...

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Economics/Finance 431/531 International Finance Ruxandra Prodan Fall 2004 Test 3 1. Consider the question of when countries should form a currency union. a) (10 points) The benefits of such union are larger when the countries are well integrated. Why? b) (10 points) The costs of such union are smaller when the countries are well integrated. Why? c) (5 points) If the world becomes more globalized, might we expect one day to see a single global currency. Why, or why not?
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2. We made the argument that floating exchange rates do a better job of stabilizing output in the short run when the economic events occurring in an economy are the type that affect the DD curve, such as shifts in investment demand , while fixed rates perform better when the shocks are the type that affect the AA curve, such as shifts in money demand. a) (10 points) Use the diagram below to demonstrate how the variability in investment demand would translate to variability in output around Y under a fixed and a floating exchange rate system. b)
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midterm3 - Economics/Finance 431/531 Ruxandra Prodan Test 3...

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