Problem Set 6 Key

Under the bretton woods agreement it had fixed

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Unformatted text preview: s boarders c. Independent monetary policy If a fixed exchange rate and monetary policy were chosen, then capital movements would have to be restricted to prevent investors from making arbitrarily large profits from the Central Bank. Currently, China has a fixed exchange rate and independent monetary policy. It restricts the flow of capital across its boarders. If China wishes to become an international financial center (like New York, London, or Hong Kong), it will need to allow for the free flow of capital across it’s boarders. The US has experimented with all possible solutions to the trilemma. During the Gold Standard, it had capital mobility and fixed exchange rates. Under the Bretton Woods agreement, it had fixed exchange rate and independent monetary policy. And most recently, it has capital mobility and independent monetary policy (with a free floating exchange rate). 4. (The point of this question is to show the counterintuitive effect of being on the receiving end of a capital flight.) Suppose counterfactually that a new financial crisis breaks out because of fears of a war between Israel and Iran. Fearful investors flee for safety and put their funds in U.S. Treasury securiti...
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This note was uploaded on 11/16/2013 for the course ECON 122A taught by Professor Nordhaus during the Fall '12 term at Yale.

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