ECON 442 International Economics 2 Final Exam

ECON 442
International Economics 2
Final Exam 
Hard copy due in my office (C 321 Clarke on May 11 by 12 noon.)
Answer all questions clearly in the space provided. Attempt all questions in Part I. Please make
sure you show all the steps of your reasoning. Answer four questions form Part II. Your answers
should be clearly argued, so think carefully and outline your answer before writing. Please type
your answers in the space provided. Figures where necessary can be drawn by hand. All the best!
Part I (60 pts)
1.

A balance sheet for a central bank of is shown below:(25)
Central Bank Balance Sheet
Assets
Liabilities
Foreign assets $3500 Deposits held by private banks
Domestic assets $1500
Currency in circulation

$2000
$3,000

a) The Central Bank sells $100 worth of foreign assets to domestic citizens who pay in
domestic currency - cash dollars). Show the change in the balance sheet

b) Suppose instead of paying in cash (as in a) the buyers of the foreign bonds pay by
drawing a check on domestic banks. Show the change in the balance sheet.

c) What is the change in money supply in part a and c?

d) What is the reason the central bank might want to sell foreign assets?

e) Now suppose the central bank wants to sterilize the impact of its foreign exchange
intervention what should it do?

f) Show the impact on the balance sheet of the central bank. (Start from the balance
sheet in part a)

Name_______________________________
g) What is the impact of sterilization on money supply

h) Why would the central bank undertake sterilization operations?

2. Use the AA DD framework to illustrate the impact of the following. Explain in
particular the impact on output and balance of payments, exchange rate and money
supply.(35)
a) Show the impact of an import tariff under fixed exchange rates.

b) In a two country setting (with fixed exchange rates) what would be the impact on
the trading partner of the country which imposed the import tariff?

Name_______________________________
c) How would the impact of an import tariff differ if there were flexible exchange
rates?

d) What is the impact of a rise in the domestic interest rate under fixed exchange
rates

e) Compare the impact in d with that under a flexible exchange rate

f) Suppose a new technological development cheapens the imports of a country.
What would be the impact under fixed rates.

Name_______________________________

g) Compare the impact in f with that under flexible exchange rates

Part II (40 pts) Answer any 4 questions.
1. What are the main causes of capital account/currency crisis in the First generation and the
Second generation models and the Keynesian approach?

Name_______________________________
2. What is the Early Warnings System approach to averting capital account crisis? How is
the Trip-wires and Speed-bump approach different from the early Warning approach?

Name_______________________________

3. Excessive savings by Asia has lead to the problem of global imbalances. Do you agree?
Explain

Name_______________________________

4.

Financial liberalization has enhanced the development and growth prospects of
developing countries by giving them access to global capital markets. Discuss

Name_______________________________

5. What is the proposed role of a World Financial authority in the reform of the international
financial system. Critically evaluate scope for such a reform.

Name_______________________________
6. Compare and contrast the causes of the collapse of the International Gold Standard and
the post war Bretton woods system.