6 questions on International Macroeconomics that deal with fixed exchange rate system, foreign exchange reserves, floating currency, exchange rate devaluations, current accounts, BOP crisis, domestic and foreign interest rates, short-run level of output, expansionary fiscal policy.

1. Suppose Mexico fixes its exchange rate against the U.S. dollar. Explain the effect on the foreign reserve holdings of the Mexican central bank if the level at which the exchange rate is pegged turns out to be lower than the one which would be obtained if the exchange rate had been allowed to float freely (in other words, Mexico enters the peg at an overvalued exchange rate). What are the implications for the Mexican money supply? Show the balance sheet of the Mexican central bank. 2. Suppose Argentina unilaterally decides to peg its currency to the U.S. dollar. Now assume that there are only these two countries in the world, and that the United States shows a surplus in its net ... click for more

Economics Questions

1.What are the two main goals of an open economy? Which goal do you believe is most important? 2.Do the meaning of these two macroeconomic goals change under a fixed exchange rate system such as Bretton Woods? If yes, then why? 3.What was the origin of the gold standard? As the use of paper currency evolved, why did the international monetary system continue to use a gold standard? Why did it return to such a standard under Bretton Woods despite earlier failures (i.e. what are the strengths and weaknesses of the gold standard)? 4.What are the "Rules of the Game", the "Price-Specie Flow Mechanism", an "International Monetary System", and "Expenditure-Changing" and "Expenditure-Sw... click for more

using AA-DD diagram

Use the AA-DD diagrammatic analysis to perform the following. Assume a flexible exchange rate regime. Label your graphs and your changes clearly. a)Compare the short-run impacts if a permanent increase in money supply versus a permanent tax cut. Keep in mind that a permanent policy alters people's expectations, which in turn shifts the AA curve. b)Compare the long-run impact of a permanent increase in money supply versus a permanent tax cut. c)What important exchange rate phenomenon underlies permanent policy changes that does not extend to temporary policy changes? Under which type of policy, monetary or fiscal, is this phenomenon responsible for accentuating the policy's... click for more

Economics questions

1. 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 rises immediately in proportion to P* (in line with PPP), show that the exchange rate will also appreciate immediately in proportion to the rise in P*. If the economy is initially in internal and external balance, will its position be disturbed by such a rise in P*? 2. If foreign inflation rates rise permanently, do you expect floating exchange rates to insulate the Canadian economy in the short-run? How about the long-run? Why? 3. How would you analyze the use of monetary and fiscal policy to maintain internal and external balance under a floating excha... click for more

Economic questions on exchange rate systems, currency union, fiscal and monetary policy with respect to exchange rate system, international banking and gains from trade

b)What are the costs and benefits of fixed versus flexible international exchange rate systems? Looking over the last 80 years, which system do you think would work best in the future? Explain. c)What are the factors that determine an optimal currency union? Would the Canadian adoption of the U.S. dollar be optimal given these factors? Explain. d)Explain why both fiscal and monetary policy under a fixed exchange rate regime require the central bank to buy or sell foreign assets. Under what circumstances is there a role for monetary policy under a fixed exchange rate regime? e)Drawing the economic zones of discomfort, show the policy combination required to take an economy to i... click for more