1) The Euro has been loosing value since its inception 1/1999.
a) 5 Points.  Show in a graph how European monetary policy could be used to increase the value of the Euro and how it would impact the US economy.
 
 
 
 
 
 
 

b) 5 Points.  draw a full employment line in your graph in (a) and discuss how such monetary policy affects employment in Europe.
 
 
 
 

2) The Russian government experienced a currency crisis in August 1998.  Until that date it had fixed 6.2 Rubles to 1 dollar.
a) 10 Points.  Which policy change must have occurred prior to August 1998 to cause a currency crisis.  Draw one graph for each policy. (At the time, Russia had an open capital account and low capital mobility.)
 
 
 
 
 
 
 

b) 5 Points.  Shortly before the crisis, Russian government bonds yielded 200 percent interest.  Which policy (in 2a above) seems to have caused the crisis? Why?
 
 

c) 5 Points.  Assume the Russian government could have used its influence to avoid actions that led to the crisis.  Can you imagine reasons why the government did not act in an "economically responsible" manner to avoid the currency crisis?
 
 
 

d) 5 Points.  Today you need about 30 Rubles to buy one dollar and the exchange rate is no longer fixed.  Is fiscal or monetary policy more effective in raising output? STATE YOUR ASSUMPTIONS on the degree of capital mobility.  Draw a graph.
 
 
 
 
 
 
 
 
 
 

3) a) 2 Points.  As part of what agreement was the IMF established?
 
 
 

a) 3 Points.  What is the role of the IMF, as defined by its charter?
 
 

b) 5 Points.  What role did the IMF play in Russia?  (See question 2).  If you do not know the exact answer, tell me what you THINK the IMF role should have been.
 
 
 
 

c) 10 Points.  Given its charter, are there circumstances under which IMF loan conditions might be popular with the citizens of a country? Why/why not? Support your answer with a graph.
 
 
 
 
 

4) 10 Points.  For a long time interest rate differentials between European countries where high.  Use the concept of Interest Parity to explain how interest rates moved closer and closer together as more countries joined the European Exchange Rate Mechanism, which introduced perfect capital mobility.
 
 
 
 
 

5) 5 Points.  State the assumptions of the Monetary Approach To The Balance Of Payments and draw a graph to show which policy is effective in raising output under the Monetary Approach To The Balance Of Payments.
 
 
 
 
 
 
 
 
 

6) 5 Points.  "Under fixed exchange rate regimes, an increase in government expenditures must lead to a balance of payments deficit" is a correct statement.
yes ?
no ?
Draw a graph to support your answer.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

7) a) 10 Points.  Draw the Mundell Swan diagram with interest rates on the horizontal axis and government expenditures on the vertical axis. Show a country that has a balance of payments deficit and unemployment.  Describe clearly the policies required to return the country to internal and external balance.
 
 
 
 
 
 
 
 

b) 5 Points.  Show the same scenario as in 7a) in the IS/LM model.
 
 
 
 
 
 
 
 

8) 5 Points.  If countries join the European (Fixed) Exchange Rate Mechanism that relies on perfect capital mobility, do they essentially give up their fiscal or monetary policy? Draw a graph and clearly explain the intuition as to which policy is ineffective.

 9) Assume a country with flexible exchange rates has a capital account given by:
KA= KA + ( )(i-i*), where TR are Transaction Costs.
9a) 10 Points.  Show how the BP = 0 line behaves in the i/Y space if TR increases.  Your answer will only be accepted with a valid explanation.
 
 
 
 
 
 
 
 
 
 

9b) 5 Points.  Using the Mundell Flemming model with the KA equation in 9a), show how the effectiveness of government policy changes as transaction costs decline over time.