Fakultät III Univ.-Prof. Dr. Jan Franke-Viebach

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1 Univ.-Pro. Dr. J. Franke-Viebach 1 Universität Siegen Fakultät III Univ.-Pro. Dr. Jan Franke-Viebach Exam International Macroeconomics Winter Semester (1 st Exam Period) Available time: 60 minutes Solution For your attention: 1. The exam is made up o 9 pages (including this cover page). Please check and see i the exam you are holding is complete. 2. For your answers, use the designated spaces. Should these not suice, use the backside o the pages. Answers written in pencil will not be scored. 3. Additional materials you may use or the exam: a non-programmable calculator. (Smart phones and mobile phones are not allowed!) 4. ATTENTION: The names or variables have the same meaning as in the lecture. Insoar as you also use the same symbols or the variables as we did in the lecture you will not have to deine these any urther. Question Sum Mark Points achievable Points achieved

2 Univ.-Pro. Dr. J. Franke-Viebach 2 Problem 1: Oicial Reserve Assets a) What are oicial reserve assets (OR)? Please give a deinition. [2.5 points] Assets - o the central bank (0.5) - that can be used to cover an excess demand or oreign currency (0.5) (0.5) (0.5) (0.5) (or: to inance a deicit o the total balance (or: BP) or: to inance a deicit o the oicial settlements balance) b) Please name two orms o OR. [2.5 points] - convertible oreign currencies (0.5) (0.5) (0.5) - gold (1) - Special Drawing Rights (SDRs) (1) - Reserve Position with - the IMF (1) Maximum: 2.5 points c) What can you say about OR within the balance o payments? [2 points] the bop records changes o OR that are due to transactions (1) (1) or: the changes o OR are equal to the negative balance on oicial settlements (0.5) (0.5) (0.5) (0.5) (or: trans OR = - OSB)

3 Univ.-Pro. Dr. J. Franke-Viebach 3 d) The balance o payments as a whole always has a balance o zero. d 1 Why? [2 points] Because o double-entry bookkeeping (2) d 2 Some authors speak o a non-zero balance o the balance o payments. What do they mean by this? [2 points] change in OR (1) (1) (or: balance on oicial settlements or: sum o all transactions except OR transactions)

4 Univ.-Pro. Dr. J. Franke-Viebach 4 Problem 2: Disequilibrium in the Money Market and External Disequilibrium The ollowing double equation shows the change in the quantity o money ( M) in its centre: e P P P L (Y, i) - M 0 = M = CR + [ TB( Y, Y, ) + CFA ( i i τ ) ] + val OR trans OR The equation allows or two dierent interpretations o the causality between a disequilibrium in the money market and an external disequilibrium. For reason o simplicity, let us assume that CR =0. a) How does the Monetary Approach to the Open Economy view the causality in the case o a ixed exchange rate system? [6 points] a disequilibrium in the money market (1) (1) leads to a desired change in the quantity o money; (1) (0.5) (0.5) this will lead to a change in the oicial reserves (1) (1) (or: to a disequilibrium o the external transactions) (1) (1) b) Now, consider a system o lexible exchange rates. b 1 What is the basic eature o such a system? [2 points] No interventions (2) (or: exchange rate determined by market orces Or: exchange rate determined by supply and demand)

5 Univ.-Pro. Dr. J. Franke-Viebach 5 b 2 What will be the immediate consequence o a lexible exchange rate system in the above equation? [2 points] trans OR = 0 b 3 Very briely describe how the Monetary Approach interprets the equation in this case. [3.5 points] a disequilibrium in the money market leads to a change o the exchange rate (0.5) (0.5) (0.5) (1) (1)

6 Univ.-Pro. Dr. J. Franke-Viebach 6 Problem 3: Keynesian Model o Internal and External Balance The ollowing equations describe an economy with unemployment and a lexible exchange rate (e). Exogenous variables are indicated by a bar ( ): (1) Y = C( Y ) + I( i ) + G + TB ( Y, e, Y ), (2) M L(Y, i ) + =, (3) BP = TB ( Y, e, Y ) + CFA ( i, i ) = a) Please give a brie interpretation o each equation (without going into the details o the behavioural unctions, such as C(Y) ). [3 points] (1) Equilibrium in the goods market (0.5) (0.5) (2) Equilibrium in the money market (0.5) (0.5) (3) External equilibrium (or: equilibrium in the orex market) (0.5) (0.5) b) The ollowing graph visualizes the model. Please designate each curve by the number o the equation that it illustrates (1), (2), (3). Please assume that capital movements are relatively interest elastic. [4 points] i A Y

7 Univ.-Pro. Dr. J. Franke-Viebach 7 i (2) (1.5) (1) (1) (3) (1.5) A Y c) Does point A represent c 1 an internal equilibrium? Please briely explain your answer. [2 points] Yes, because A lies on (1) as well as on (2) (1) (0.5) (0.5) c 2 an external equilibrium? Please briely explain your answer. [1.5 points] Yes, because A lies on (3) (1) (0.5) d) We want to analyze an increase o the oreign interest rate: i. d 1 Please give the number o the equation that is directly aected. [1 point] (3) (1)

8 Univ.-Pro. Dr. J. Franke-Viebach 8 d 2 How does that curve shit in vertical direction: up or down? Please explain your answer by an arrow scheme or verbally. [4 points] - up (1) - verbal explanation: (i) the rise o i causes a rising demand (1) or oreign assets (1) (or: a decline o CFA) (ii) in order to reduce the demand (or: to re-raise CFA), (0.5) i must increase (0.5) - arrow scheme: i CFA i must (2) (1) d 3 Please indicate the shit in the ollowing graph. [1 point] i A Y

9 Univ.-Pro. Dr. J. Franke-Viebach 9 i (1) A Y d 4 Point A is no longer an external equilibrium. Please explain the external disequilibrium and the resulting reaction o the exchange rate by an arrow scheme or verbally. [4 points] CFA (or: i is too low) BP < 0 ( or: D d > D s ) e (1) (1) (2) Or: the rising demand or oreign assets (1) leads to an excess demand or oreign currency (or: to a negative BP); (1) this causes a rise in e (2) d 5 The change in e leads to urther shits o curves. Please indicate these shits in the graph in d 3 and denote the new external and internal equilibrium as point B. [6 points] i (2 : 1 shit ; 1 rightward) B (2) A (2 : 1 shit ; 1 rightward) Y

10 Univ.-Pro. Dr. J. Franke-Viebach 10 Problem 4: Portolio-Balance Approach to the Exchange Rate a) What is the research question o the portolio-balance approach? [4 points] Signiicance o inancial markets or the nominal exchange rate in the short run (1.5) (0.5) (0.5) (1.5) b) Consider the ollowing equilibrium conditions o the money market and the market or oreign assets: M = m (i, i ) (M + B + e F), e F = (i, i ) (M + B + e F). The domestic central bank wants to increase the exchange rate (e). In order to achieve this goal, it oers private investors a transaction in oreign currency against domestic currency (M). b 1 Should it buy or sell oreign currency rom private investors? [1.5 points] buy (1.5) b 2 Private investors in turn aect the corresponding change in oreign currency by a transaction in oreign assets (F). Do they buy or sell oreign assets? [1.5 points] sell (1.5) b 3 Please express in mathematical terms the corresponding asset exchange within private wealth. [2 points] dm = - e df (0.5) (0.5) (0.5)(0.5)

Fakultät III Univ.-Prof. Dr. Jan Franke-Viebach

Univ.-Prof. Dr. J. Franke-Viebach 1 Universität Siegen Fakultät III Univ.-Prof. Dr. Jan Franke-Viebach Exam International Macroeconomics Winter Semester 2014-15 (1 st Exam Period) Available time: 60 minutes