ECON 4131, International Finance, Spring 2002, Exam 3 Final Essay

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Final Exam Questions -- Economics 4131, Spring 2006
1. Explain how the gold standard operated in the classical period (1870-1914). What were the advantages and disadvantages? Some say the gold standard sacrificed internal balance to external balance. How? What were the “rules of the game” and what would happen when they were violated? What would happen when the demand for monetary gold rose faster than the supply, and why was this a problem?
2. Explain the functioning of the Bretton Woods currency arrangement. Why was it designed as it was? What strains appeared over time, and what factors led to its collapse?
What was “Triffin’s dilemma”?
3. Use the national income accounting identity to explain the phenomenon of “twin
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What is “sterilization,” and how might it be employed (and why)?
5. “When capital is mobile, a country may choose to peg its exchange rate, or it may choose to peg its money supply, but it cannot do both simultaneously.” Explain.
6. Explain the full derivation of the AA-DD model from Krugrman and Obstfeld, Chapter
16. Explain how and why the economy returns to equilibrium from any point away from the intersection of the two curves. Explain what it means to be above or below AA or
DD, respectively.
7. Use the AA-DD model to illustrate how the economy adjusts to an increase in government spending when a) exchange rates are flexible; b) exchange rates are fixed.
Discuss.
8. Use the AA-DD model to illustrate how the economy adjusts to an increase in the domestic money supply (expansionary monetary policy) when: a) exchange rates are flexible; b) exchange rates are fixed. Discuss.
9. Use the AA-DD model to explain what will happen to an economy if investors (and/or speculators) lose faith in the fixed parity of the exchange rate (i.e. if they anticipate a future exchange rate that suddenly becomes higher). Discuss the full ramifications for the country whose credibility is doubted and challenged in this respect.
10. Explain the 3 perspectives on the U.S. Current account deficit which Mann describes.
In her view, how likely is the U.S. to face a balance of payments/devaluation crisis as a

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