PART I. Identify and explain what each of the following terms or concepts refers

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Dec 16, 2022

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PART I. Identify and explain what each of the following terms or concepts refers to and why it is relevant for the study of international economics (Choose 3 out of 5. Each merits 15 points, total 45 points):
1. Given the current account bilateral surplus of Germany with the US, one might say that German savers will be financing President Biden’s infrastructure program. Explain the economics underlying this statement using the concepts we have studied. Why is being a “reserve currency” helpful in this process?
2. Explain the effects of the Federal Reserve’s monetary tightening on the US housing market, on the value of the dollar, and on the US balance of payments. How does it affect Emerging Market Economies?
3. Observers argue that shadow banking, such as exists in China, is an example of regulatory arbitrage. Explain the concept and the reluctance of the People’s Bank of China to reign in shadow banking. How does this relate to a Minsky Moment and the concept of moral hazard?
4. What can we learn from Kaufmann-Kraay World Governance Indicators and how can they be used? Why do economists argue that institutions matter for development and what do they mean by this? What are some problems associated with rankings in general and why should they be used with care?
5. Explain the benefits and cost of a fixed exchange rate? Why can it be argued that there is no optimal level of reserves to support a fixed rate? What do our case experiences teach us about the perils of fixed exchange rate regimes, and what factors can lead to their unravelling?
Part II: Short Essay Questions. Select 1 of 2 and answer in at least 4 paragraphs being careful to be precise about the economic logic (The question is worth 25 points).
1. It is said that Mexico suffered a triple crisis in 1994. EXPLAIN: a) what is meant by this in economic terms, b) how and why the crisis developed in Mexico in 1994, c) why when an economy booms and people spend more and savings drop, it can create BOP imbalances that are risky, d) why it is hard to stop financial distress from spilling over from one segment of the economy to another, and e) how the Mexican authorities made things worse than they needed to be once the crisis developed. Add any other factors that you think are relevant to understanding the case.
2. It is often said that the East Asia financial crisis of 1997 showed a) the meaning of financial contagion, b) importance of supervising and regulating maturity and currency mismatches, c) the dangers of a fixed exchange rate, d) the risks of excess leveraging, and e) the fact that not all IMF programs are properly designed. EXPLAIN WHAT EACH OF THESE OBSERVATIONS REFERS TO AND WHY IT HELPS EXPLAIN THE CRISIS. Add any other factors that helps us understand the causes and consequences of the crisis.
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Part III: Long Essay. Select either topic 1 or topic 2 and write 5-6 paragraphs to answer all parts of the question. It is worth 30 points. Be careful to read and reread the question and perhaps outline your essay first.
1. An Emerging Market Economy is faced with a decline in its exports (a commodity shock or a loss of tourist revenues) and this affects its balance of payments. Since it also affects government tax revenue, it’s a dual shock and the economy is expecting to grow more slowly. FIRST, what options does the Minister of Finance have with respect to fiscal policies? SECOND, what options does the Governor of the Central Bank have in dealing with this problem in terms of monetary policy responses? THIRD, what lessons have we learned that can usefully guide those choices and what should be avoided? FOURTH, to avoid a full-blown default on external debt, what economic variables should the Government be monitoring and why? FIFTH, what lessons have we learned from cases studies that offer relevant lessons with respect to what increases or reduces vulnerabilities? Be specific in your observations and recommendations.
2. Prime Minister Liz Truss said she would reduce tax rates and increase energy subsidy supports, while at the same time expecting the Bank of England (BOE) to fight inflation. FIRST explain why markets reacted the way they did and what the problem was with her policy stance? THEN explain why she made the made the job of the Bank of England (central bank) more difficult in fighting inflation? THIRD, explain why when the long-term bond market (gilts) collapsed and it required Bank of England intervention, it created additional complications for monetary policy? FOURTH, explain why the British Pound lost value as a result of Truss economic program and the slower rise of interest rates by the BOE than the US Fed? FIFTH, what do we learn from this experience and what’s the relevance for other countries in the conduct of the fiscal and monetary policies?
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