Eco 4713
Prof. Mihaela Pintea
Name
Final
1. (20p) In a graph representing the internal balance-external balance model, show and
explain what happens if there is an increase in the foreign price P*.
i.
What would restore balance immediately?
ii.
If changing the exchange rate is not feasible, how would equilibrium be restored in
the long run? Explain what happens to domestic price level P and the real exchange
rate.
2. (20p) After 1985 the US asked Japan to adopt fiscal and monetary expansion as ways of
increasing foreign demand for US output and reducing the American current account
deficit. Use a two country model to answer the following questions:
i.
Would fiscal expansion by Japan have accomplished these goals? What about monetary
expansion? Explain.
ii.
Now assume that there was a fixed exchange rate between the yen and the dollar. What
would happen to the output in Japan if it followed a fiscal and monetary expansion?
Explain.
3. (20p)
i. Explain why one of the arguments pro floating exchange rates is that they confer
Monetary Policy Autonomy.
ii. Explain why some argue that this is just an illusion, i.e. one case against floating
exchange rate is “the illusion of greater autonomy”.
4. (20p) On March 26th, 2012 the Economist reported the following related to the euro
crisis:
“IN ANCIENT Greek mythology, a three-headed dog guards the gates of hell and prevents the
damned from leaving. It's not a bad metaphor for the present euro crisis, as Jay Shambaugh
makes clear in a paper presented as part of the Brookings Papers on Economic Activity, entitled
"The euro's three crises". The single currency is saddled with not one but three serious
problems, he explains: a banking crisis, a debt crisis, and a growth crisis. “
Explain how the three crises are interconnected.
5. (10p) How would you reconcile the increase in the US external debt with decreasing real
long term interests rates during the 2000s?
6. (10p) Choose a country from South America and explain what reforms were pursued and
what happened with its economy after the 1980s “debt crisis”.