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What happens to the current account balance right after the oil price shock and after the government stops supporting the currency? What items of the current account are likely to change and why?    b. How is the market for non-tradables in the domestic economy affected in these two stages?    c. What will the IMF likely ask the government to do as a condition for providing it with the emergency loan? What justifications are there for these IMF conditions? Why are these conditions highly unpopular politically?

What happens to the current account balance right after the oil price shock and after the government stops supporting the currency? What items of the current account are likely to change and why?    b. How is the market for non-tradables in the domestic economy affected in these two stages?    c. What will the IMF likely ask the government to do as a condition for providing it with the emergency loan? What justifications are there for these IMF conditions? Why are these conditions highly unpopular politically?

Understanding Business
Understanding Business
12th Edition
ISBN:9781259929434
Author:William Nickels
Publisher:William Nickels
Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment
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refer to the photo and answer the following

a. What happens to the current account balance right after the oil price shock and after the government stops supporting the currency? What items of the current account are likely to change and why? 

 

b. How is the market for non-tradables in the domestic economy affected in these two stages? 

 

c. What will the IMF likely ask the government to do as a condition for providing it with the emergency loan? What justifications are there for these IMF conditions? Why are these conditions highly unpopular politically?

Country X is a major oil exporter. It has a floating exchange rate system and has managed to maintain current account surpluses for some time, which it used to build up its foreign exchange reserves over the years. Oil prices suddenly fall from around $100 a barrel to $29 a barrel in the course of a single year, making a huge dent in the country's ability to earn foreign exchange from its exports. The government first considers the drop in oil prices temporary and decides to draw down its reserves to finance the emerging deficit in its current account and to support the country's currency. However, domestic and foreign investors, seeing a looming currency crisis and an eventual depreciation of the country's currency start converting their assets into foreign exchange and pulling their money out of the country, putting further pressure on the value of the country's s currency, but the government continues to support the currency by using its vast reserves. Eventually, as the reserves begin to run low, the government acknowledges that the oil price declines are durable and changes tack by no longer using its reserves to purchase the local currency to shore up its value. A rapid depreciation of the currency occurs, leading to a spike in domestic inflation and causing further downward pressure on the value of the currency and further inflationary pressures. Faced with a continuing foreign exchange crisis and depleted reserves, the government of county X approaches the IMF for an emergency loan. As a condition for the loan, the IMF demands that the country undertake further stabilization measures to stabilize the macro economy and adjust to the new reality of lower oil prices.
Transcribed Image Text:Country X is a major oil exporter. It has a floating exchange rate system and has managed to maintain current account surpluses for some time, which it used to build up its foreign exchange reserves over the years. Oil prices suddenly fall from around $100 a barrel to $29 a barrel in the course of a single year, making a huge dent in the country's ability to earn foreign exchange from its exports. The government first considers the drop in oil prices temporary and decides to draw down its reserves to finance the emerging deficit in its current account and to support the country's currency. However, domestic and foreign investors, seeing a looming currency crisis and an eventual depreciation of the country's currency start converting their assets into foreign exchange and pulling their money out of the country, putting further pressure on the value of the country's s currency, but the government continues to support the currency by using its vast reserves. Eventually, as the reserves begin to run low, the government acknowledges that the oil price declines are durable and changes tack by no longer using its reserves to purchase the local currency to shore up its value. A rapid depreciation of the currency occurs, leading to a spike in domestic inflation and causing further downward pressure on the value of the currency and further inflationary pressures. Faced with a continuing foreign exchange crisis and depleted reserves, the government of county X approaches the IMF for an emergency loan. As a condition for the loan, the IMF demands that the country undertake further stabilization measures to stabilize the macro economy and adjust to the new reality of lower oil prices.
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