Review_Questions_Chapters_19__20 - True/False/Uncertain...

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ECMC61 – International Economics: Finance Review Questions – Chapters 19 - 20 Chapter 19 – International Monetary Systems: An Historical Overview Question 1: Problems #10. Use the DD-AA model to examine the effects of a one-time rise in the foreign price level, P * . If the expected future exchange rate E e rise (expected DC to appreciate) immediately in proportion to P * (inline with PPP), show that the exchange rate will also appreciate immediately in proportion to the rise in P * . What will be the overall effects of this change in P* on the domestic money market and the current account? Question 2: Problems #12. (Use DD-AA model) Question 3: If the shocks to the economy are originated from the output market, then flexible exchange rate is better because the fluctuations in output are smaller. Discuss and use the DD-AA model to support your argument. Question 4: Fiscal policy is more effective under fixed exchange rate than it is under floating exchange rate.
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Unformatted text preview: True/False/Uncertain, explain in the context of the DD-AA model. Question 5: Consider two countries: Home (H) and Foreign (F). Home government has 2 policy options: increase taxes (T ↑ ), and decrease taxes (T ↓ ). Foreign central bank has 2 policy options: increase money supply (MS* ↑ ), and decreases money supply (MS* ↓ ). The payoff matrix is: Foreign MS* ↑ MS* ↓ Home T ↑ 2, 6 4, 5 T ↓ 3, 4 1, 2 (Home’s payoff, Foreign’s payoff) a) Write down the strategies for both countries. b) If both countries choose their policies simultaneously, find the Nash equilibrium. Does the problem of coordination failure exist? Explain. Chapter 20 – Optimum Currency Areas and the European Experience Question 1: Problems #5 Question 2: Problems #6 (No need to draw the diagram, just explain in words only). 1...
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