Chapter 24 CRISES IN EMERGING MARKETS

Size: px
Start display at page:

Download "Chapter 24 CRISES IN EMERGING MARKETS"

Transcription

1 Chapter 24 CRISES IN EMERGING MARKETS The previous chapter extended the IS-LM-BP model to accommodate high capital mobility. Chapter 24 applies that model to the crises that beset some middle-income countries after they made their financial markets more open to international investors. During the early 1990s, these emerging markets attracted large inflows of capital. When capital flows reversed, crises followed. The flow of capital into emerging markets during the early 1990s was due to internal and external factors. Internal factors include capital account liberalization, privatization of state assets, successful monetary stabilization, and other market-oriented policy reforms. External factors include low U.S. interest rates, implementation of the Brady debt reduction plan, and financial innovations that made it easier for investors in rich countries to invest in developing countries. Using the IS-LM-BP framework, the chapter describes possible policy responses to these large capital flows. In response to inflows, a country can: (a) allow reserves to rise (but this may be inflationary); (b) sterilize the inflow (but this cannot be sustained indefinitely); (c) let the currency appreciate (but this may result in recession); (d) restrict capital inflows (but this raises the cost of financing development); or (e) reduce the budget deficit (but this might actually encourage rather than discourage capital inflows). In response to the outflows that must eventually follow, a country has the opposite set of policy options: it can allow the money supply to fall; it can try sterilizing the outflow; it can allow depreciation; and it can restrict outflows. Slow adjustment to capital outflows left countries vulnerable to speculative attack. The chapter discusses three rationales for such attacks. One is that overly expansionary macroeconomic policy depletes reserves, and speculators hold the currency until there are just enough reserves left to redeem their holdings, at which point their mass exit abruptly drives reserves to zero. The possibility of multiple equilibria is an alternative explanation, with abrupt movement from one equilibrium to another producing a crisis. A third view is that, in some countries, firms with privileged connections to government take excessive risks because they expect public bailouts (hence the term crony capitalism ). In this theory, foreign investors all seek to cash in their investments when the government s liabilities are about to exceed reserves. Countries facing speculative attacks had few options. Most turned to the International Monetary Fund and agreed to a set of policy reforms in exchange for an IMF loan. Immediate and sharp recession accompanied these adjustment programs, in part because of the contractionary effects of devaluation. The chapter details a number of devaluation s effects, demand-side and supply-side, that are omitted from the models of earlier chapters. It also considers the merits of capital account restrictions, seen by some countries as an alternative to IMF intervention.

2 The harshness of the recessions in emerging markets suggests that the international financial system has not worked as well as it could. The chapter closes with an overview of proposals to reform the international financial system in ways that would reduce the risk of crises in emerging markets. SHORT-ANSWER QUESTIONS 1. Why might the removal of restrictions on capital outflows increase capital inflows? 2. Identify three ways in which a country could move overnight from a balance of payments surplus to a balance of payments deficit. 3. True or false: a. A country is less vulnerable to financial crisis if its borrowing is short-term rather than long-term. b. A country is less vulnerable to financial crisis if its borrowing is denominated in foreign currency. c. A country is less vulnerable to financial crisis if its borrowing takes the form of bank loans rather than foreign direct investment (FDI). 4. Despite the insignificant trade and financial links between Russia and Latin American countries, the 1998 Russian debt default depressed stock prices in Latin America. Why? 5. Name two ways that moral hazard may have contributed to the crises in emerging markets. 6. Why do some economists argue that the traditional IMF macroeconomic prescriptions were inappropriate in the context of the East Asian crises? 7. Identify three elements of structural conditionality. 8. Explain why the contractionary effect of an ad valorem tariff is magnified by a devaluation.

3 9. In countries with a history of high inflation, wage contracts are sometimes indexed to the price level. Explain how this indexation can be an obstacle to adjustment. 10. Explain why, if devaluation is contractionary, there may not be any combination of interest rate and exchange rate that can return a country to both internal and external balance. PROBLEMS Reasons for Capital Inflows: 1. Imagine that your country s monetary policy is unchanged yet the country starts to experience large capital inflows. (a) An economist tells you that this is because there has been a vertical downward shift of the country s BP=0 curve. What might he be trying to say about other countries monetary policy or business cycles? (b) A second economist disagrees, insisting that inflows are due to the removal of controls on capital outflows. What is this economist claiming has happened to the BP=0 curve? (c) A third economist claims that the capital flows are attributable entirely to the invention of American Depository Receipts. Will her IS-LM-BP diagram resemble that of the first economist or that of the second? 2. Answer the following questions using the IS-LM-BP diagram. (a) Suppose that, all of a sudden, a country s residents wish to make nearly all of their purchases in cash, while keeping the level of their spending constant. Could this give rise to capital inflows? (b) How might the sudden availability of credit cards in this country give rise to capital inflows? (c) Imagine a country in which the government has sold all of its state-owned enterprises (such as power companies, mining operations, or airlines) in quick succession. How might the end of the privatization program affect capital inflows?

4 Managing Capital Inflows: 3. Suppose that your country s recent commitment to a fixed exchange rate has sharply lowered inflation, and that the country has begun to experience large capital inflows as a result. A friend who works in the central bank tells you that the central bank will soon give up its practice of sterilizing the inflows, because the inflows are unlikely to stop in the near future. (a) (b) Would you decrease or increase your holdings of real estate? Would you decrease or increase your holdings of long-term government bonds? 4. Explain why a quasi-fiscal deficit is a problem specific to developing countries. 5. Imagine that you live in a small country that has a floating exchange rate and has begun to experience large capital inflows. You are the local Mercedes dealer, your sister owns a local shoe factory, and your parents own several apartment buildings in the capital city. (a) Whose business is likely to benefit the most from the inflows? (b) Whose business is likely to suffer the most? Speculative Attacks: 6. (a) Given that the crony capitalism of East Asian countries has been in place for decades, does it make sense to blame their financial structures for the crises they experienced in 1997 and 1998? (b) Why might foreign investors remain in a country beyond the day that they conclude that the government s policies are expansionary and will eventually exhaust the country s reserves of hard currency and force it to devalue? (c) In what model of speculative attacks could the unemployment rate be a critical variable? 7. The neoclassical theory of borrowing suggests that the socially optimal level of capital flowing from developed to developing countries should be greater than it is. What does this suggest about the argument that the financial crises in Asia are entirely due to the moral hazard problem created by past international bailouts by the IMF and the G7 countries?

5 International Monetary Fund Adjustment Programs: 8. (a) In what sort of financial crisis does the IMF merely act as the international financial system s lender of last resort? (b) Why does the IMF make demands of private lenders when negotiating a country s rescue package? (c) If recent crises in emerging markets have stemmed largely from defects in countries financial structure, why have the IMF s structural adjustment programs often produced recessions? (d) In the past, IMF country reports were confidential. What are two possible drawbacks of its recent decision to start publishing country reports? Contractionary Effects of Devaluation: 9. (a) List some possible contractionary effects of a devaluation. (b) Which of these effects are likely to be peculiar to low-income countries? (c) Which of these effects do you think may be important immediately following the devaluation but will have less of an impact in the long run? Capital Controls: 10. (a) What does a country gain by taxing domestic banks short-term foreign borrowing more heavily than their longer-term borrowing? (b) What is gained by imposing higher reserve requirements on domestic banks foreign borrowing than on their domestic borrowing?

Chapter 4 Monetary and Fiscal. Framework

Chapter 4 Monetary and Fiscal. Framework Chapter 4 Monetary and Fiscal Policies in IS-LM Framework Monetary and Fiscal Policies in IS-LM Framework 64 CHAPTER-4 MONETARY AND FISCAL POLICIES IN IS-LM FRAMEWORK 4.1 INTRODUCTION Since World War II,

More information

Chapter 18. The International Financial System

Chapter 18. The International Financial System Chapter 18 The International Financial System Unsterilized Foreign Exchange Intervention Federal Reserve System Assets Liabilities Federal Reserve System Assets Liabilities Foreign Assets -$1B Currency

More information

Macroeconomics in an Open Economy

Macroeconomics in an Open Economy Chapter 17 (29) Macroeconomics in an Open Economy Chapter Summary Nearly all economies are open economies that trade with and invest in other economies. A closed economy has no interactions in trade or

More information

dr Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw

dr Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw Main assumptions of the model Small open economy Short term analysis constant prices and wages

More information

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 18 The International Financial System

Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 18 The International Financial System Economics of Money, Banking, and Fin. Markets, 10e (Mishkin) Chapter 18 The International Financial System 18.1 Intervention in the Foreign Exchange Market 1) A central bank of domestic currency and corresponding

More information

Chapter 18. The International Financial System Intervention in the Foreign Exchange Market

Chapter 18. The International Financial System Intervention in the Foreign Exchange Market Chapter 18 The International Financial System 18.1 Intervention in the Foreign Exchange Market 1) A central bank of domestic currency and corresponding of foreign assets in the foreign exchange market

More information

macro macroeconomics Aggregate Demand in the Open Economy N. Gregory Mankiw CHAPTER TWELVE PowerPoint Slides by Ron Cronovich fifth edition

macro macroeconomics Aggregate Demand in the Open Economy N. Gregory Mankiw CHAPTER TWELVE PowerPoint Slides by Ron Cronovich fifth edition macro CHAPTER TWELVE Aggregate Demand in the Open Economy macroeconomics fifth edition N. Gregory Mankiw PowerPoint Slides by Ron Cronovich 2002 Worth Publishers, all rights reserved Learning objectives

More information

The Open Economy Revisited: the Exchange-Rate Regime

The Open Economy Revisited: the Exchange-Rate Regime C H A P T E R 12 : the Mundell-Fleming Model and the Exchange-Rate Regime MACROECONOMICS SIXTH EDITION N. GREGORY MANKIW PowerPoint Slides by Ron Cronovich 2008 Worth Publishers, all rights reserved In

More information

Mexico s relationship with its real exchange rate has been tumultuous since its first

Mexico s relationship with its real exchange rate has been tumultuous since its first Policy Brief Stanford Institute for Economic Policy Research Mexico s Macroeconomic Policy Dilemma: How to deal with the super-peso? José Antonio González Mexico s relationship with its real exchange rate

More information

MACROECONOMICS. The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime MANKIW N. GREGORY

MACROECONOMICS. The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime MANKIW N. GREGORY C H A P T E R 12 The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime MACROECONOMICS N. GREGORY MANKIW 2007 Worth Publishers, all rights reserved SIXTH EDITION PowerPoint

More information

Chapter 13 The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime

Chapter 13 The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime Chapter 13 The Open Economy Revisited: the Mundell-Fleming Model and the Exchange-Rate Regime Modified by Yun Wang Eco 3203 Intermediate Macroeconomics Florida International University Summer 2017 2016

More information

University of Toronto July 21, 2010 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #2

University of Toronto July 21, 2010 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #2 Department of Economics Prof. Gustavo Indart University of Toronto July 21, 2010 SOLUTIONS ECO 209Y L0101 MACROECONOMIC THEORY Term Test #2 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total

More information

B.Sc. International Business and Politics International Economics Copenhagen Business School. Final Exam October 22, 2010

B.Sc. International Business and Politics International Economics Copenhagen Business School. Final Exam October 22, 2010 B.Sc. International Business and Politics International Economics Copenhagen Business School Final Exam October, 00 Note: Your grade depends not just on the right answer but on the quality of the explanation

More information

483 Subject Index. Global Depositiory Receipts, 250 Grassman s law, 148, 160

483 Subject Index. Global Depositiory Receipts, 250 Grassman s law, 148, 160 Subject Index Adjustabonos, 401-3 Agency for International Development, 100 American depository receipts (ADRs): considered as foreign securities, 250; traded on over-the-counter market, 245 Arbitrage:

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Econ 330 Spring 2017: FINAL EXAM Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Tobin's q theory suggests that monetary

More information

Ten Lessons Learned from the Korean Crisis Center for International Development, 11/19/99. Jeffrey A. Frankel, Harpel Professor, Harvard University

Ten Lessons Learned from the Korean Crisis Center for International Development, 11/19/99. Jeffrey A. Frankel, Harpel Professor, Harvard University Ten Lessons Learned from the Korean Crisis Center for International Development, 11/19/99 Jeffrey A. Frankel, Harpel Professor, Harvard University The crisis has now passed in Korea. The excessive optimism

More information

Chapter 18 (7) Fixed Exchange Rates and Foreign Exchange Intervention

Chapter 18 (7) Fixed Exchange Rates and Foreign Exchange Intervention Chapter 18 (7) Fixed Exchange Rates and Foreign Exchange Intervention Preview Balance sheets of central banks Intervention in the foreign exchange markets and the money supply How the central bank fixes

More information

14.05 Intermediate Applied Macroeconomics Problem Set 5

14.05 Intermediate Applied Macroeconomics Problem Set 5 14.05 Intermediate Applied Macroeconomics Problem Set 5 Distributed: November 15, 2005 Due: November 22, 2005 TA: Jose Tessada Frantisek Ricka 1. Rational exchange rate expectations and overshooting The

More information

University of Toronto July 15, 2016 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #2

University of Toronto July 15, 2016 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #2 Department of Economics Prof. Gustavo Indart University of Toronto July 15, 2016 SOLUTIONS ECO 209Y L0101 MACROECONOMIC THEORY Term Test #2 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total

More information

Prepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld

Prepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld Chapter 17 Fixed Exchange Rates and Foreign Exchange Intervention Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld

More information

Chapter 10 (part 2) Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy. Copyright 2009 Pearson Education Canada

Chapter 10 (part 2) Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy. Copyright 2009 Pearson Education Canada Chapter 10 (part 2) Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy Copyright 2009 Pearson Education Canada Today Last class we saw the policy implications in the Mundell-Fleming

More information

file:///c:/users/moha/desktop/mac8e/new folder (13)/CourseComp...

file:///c:/users/moha/desktop/mac8e/new folder (13)/CourseComp... file:///c:/users/moha/desktop/mac8e/new folder (13)/CourseComp... COURSES > BA121 > CONTROL PANEL > POOL MANAGER > POOL CANVAS Add, modify, and remove questions. Select a question type from the Add drop-down

More information

University of Toronto July 27, 2012 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #3

University of Toronto July 27, 2012 ECO 209Y L0101 MACROECONOMIC THEORY. Term Test #3 Department of Economics Prof. Gustavo Indart University of Toronto July 27, 2012 SOLUTIONS ECO 209Y L0101 MACROECONOMIC THEORY Term Test #3 LAST NAME FIRST NAME STUDENT NUMBER INSTRUCTIONS: 1. The total

More information

Econ 102 Final Exam Name ID Section Number

Econ 102 Final Exam Name ID Section Number Econ 102 Final Exam Name ID Section Number 1. Which of the following is not an accurate statement of core capital goods? A) proxy for business investments B) does not include transportation equipment C)

More information

Suggested Solutions to Problem Set 4

Suggested Solutions to Problem Set 4 Department of Economics University of California, Berkeley Spring 2006 Economics 182 Suggested Solutions to Problem Set 4 Problem 1 : True, False, Uncertain (a) False or Uncertain. In first generation

More information

Econ / Summer 2005

Econ / Summer 2005 Econ 3560.001 / 5040.001 Summer 2005 INTERMEDIATE MACROECONOMIC THEORY / MACROECONOMIC ANALYSIS FINAL EXAM Name (Last) (First) Signature Instructions The exam consists of 30 multiple-choice questions (Part

More information

MACROECONOMICS IN THE GLOBAL ECONOMY

MACROECONOMICS IN THE GLOBAL ECONOMY Exam Number Section MACROECONOMICS IN THE GLOBAL ECONOMY Professor Antonio Fatás Final Exam February 23, 2015 Instructions: (PLEASE READ) Space to answer the questions is limited. DO NOT WRITE IN THE BACK

More information

Study Questions (with Answers) Lecture 20 International Policies for Economic Development: Financial

Study Questions (with Answers) Lecture 20 International Policies for Economic Development: Financial Study Questions (with Answers) Page 1 of 5 Study Questions (with Answers) Lecture 20 International Policies for Economic Development: Financial Part 1: Multiple Choice Select the best answer of those given.

More information

Chapter 18 (7) Fixed Exchange Rates and Foreign Exchange Intervention

Chapter 18 (7) Fixed Exchange Rates and Foreign Exchange Intervention Chapter 18 (7) Fixed Exchange Rates and Foreign Exchange Intervention Preview Balance sheets of central banks Intervention in the foreign exchange markets and the money supply How the central bank fixes

More information

Chapter 18: Output and the Exchange Rate in the Short Run

Chapter 18: Output and the Exchange Rate in the Short Run Chapter 18: Output and the Exchange Rate in the Short Run Krugman, P.R., Obstfeld, M.: International Economics: Theory and Policy, 8th Edition, Pearson Addison-Wesley, 460-500 1 Preview Balance sheets

More information

3/9/2010. Topics PP542. Macroeconomic Goals (cont.) Macroeconomic Goals. Gold Standard. Macroeconomic Goals (cont.) International Monetary History

3/9/2010. Topics PP542. Macroeconomic Goals (cont.) Macroeconomic Goals. Gold Standard. Macroeconomic Goals (cont.) International Monetary History Topics PP542 International Monetary History Goals of macroeconomic policies Gold standard International monetary system during 98-939 Bretton Woods system: 944-973 Collapse of the Bretton Woods system

More information

ECO 209Y - L5101 MACROECONOMIC THEORY. Term Test #2

ECO 209Y - L5101 MACROECONOMIC THEORY. Term Test #2 Department of Economics Prof. Gustavo Indart University of Toronto July 19, 2005 SOLUTIONS ECO 209Y - L5101 MACROECONOMIC THEORY Term Test #2 LAST NAME FIRST NAME INSTRUCTIONS: STUDENT NUMBER 1. The total

More information

I don't understand the argument that even though inflation is not accelerating, the world nevertheless suffers from "global excess liquidity":

I don't understand the argument that even though inflation is not accelerating, the world nevertheless suffers from global excess liquidity: August 17, 2005 Global Excess Liquidity? I don't understand the argument that even though inflation is not accelerating, the world nevertheless suffers from "global excess liquidity": Economics focus A

More information

East Asia Crisis of Econ October 8, Team 5 Bryan Darch Svend Egholm Paramdeep Singh Sarah Zullo

East Asia Crisis of Econ October 8, Team 5 Bryan Darch Svend Egholm Paramdeep Singh Sarah Zullo East Asia Crisis of 1997 Econ 7920 October 8, 2008 Team 5 Bryan Darch Svend Egholm Paramdeep Singh Sarah Zullo The East Asian currency crisis of 1997 caused severe distress for the countries of East Asia

More information

Chapter 13 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy

Chapter 13 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy Chapter 13 Exchange Rates, Business Cycles, and Macroeconomic Policy in the Open Economy 1 Goals of Chapter 13 Two primary aspects of interdependence between economies of different nations International

More information

Economic Dynamics and Integration in Eastern Europe and Asia Lecture Winter semester 2017/18

Economic Dynamics and Integration in Eastern Europe and Asia Lecture Winter semester 2017/18 Economic Dynamics and Integration in Eastern Europe and Asia Lecture Winter semester 2017/18 Chair for Macroeconomic Theory and Politics Schumpeter School of Business and Economics Bergische Universität

More information

Index. exchange rates, 104 5, net inflows, 100, 115, Bretton Woods system, 96 7 business cycles, 57

Index. exchange rates, 104 5, net inflows, 100, 115, Bretton Woods system, 96 7 business cycles, 57 Index additional monetary tightening (AMT), 43 4 advanced economies, central banks in, 35 6 agency problems, 153, 163n47 aggregate demand, 18, 138 9, 141 2 Asian financial crisis, 8, 10, 13 15, 57, 65,

More information

Chapter 19 (8) International Monetary Systems: An Historical Overview

Chapter 19 (8) International Monetary Systems: An Historical Overview Chapter 19 (8) International Monetary Systems: An Historical Overview Preview Goals of macroeconomic policies internal and external balance Gold standard era 1870 1914 International monetary system during

More information

Chapter Eleven. The International Monetary System

Chapter Eleven. The International Monetary System Chapter Eleven The International Monetary System Introduction 11-3 The international monetary system refers to the institutional arrangements that govern exchange rates. Floating exchange rates occur when

More information

ECO 209Y MACROECONOMIC THEORY AND POLICY. Term Test #2. December 13, 2017

ECO 209Y MACROECONOMIC THEORY AND POLICY. Term Test #2. December 13, 2017 ECO 209Y MACROECONOMIC THEORY AND POLICY Term Test #2 December 13, 2017 U of T E-MAIL: @MAIL.UTORONTO.CA SURNAME (LAST NAME): GIVEN NAME (FIRST NAME): UTORID (e.g., LIHAO118): INSTRUCTIONS: The total time

More information

UC Berkeley Fall Final examination SOLUTION SHEET

UC Berkeley Fall Final examination SOLUTION SHEET Pierre-Olivier Gourinchas Econ182 Department of Economics International Monetary Economics UC Berkeley Fall 2004 Final examination SOLUTION SHEET WRITE YOUR ANSWERS TO QUESTION 1 ON PAGES 2-5. 1. [30 points,

More information

TOPIC 9. International Economics

TOPIC 9. International Economics TOPIC 9 International Economics 2 Goals of Topic 9 What is the exchange rate? NX back!! What is the link between the exchange rate and net exports? What is the trade deficit? How do different shocks affect

More information

ECO 209Y MACROECONOMIC THEORY AND POLICY. Term Test #2. December 13, 2017

ECO 209Y MACROECONOMIC THEORY AND POLICY. Term Test #2. December 13, 2017 ECO 209Y MACROECONOMIC THEORY AND POLICY Term Test #2 December 13, 2017 U of T E-MAIL: @MAIL.UTORONTO.CA SURNAME (LAST NAME): GIVEN NAME (FIRST NAME): UTORID (e.g., LIHAO118): INSTRUCTIONS: The total time

More information

Chapter 19 International Monetary Systems: An Historical Overview

Chapter 19 International Monetary Systems: An Historical Overview Chapter 19 International Monetary Systems: An Historical Overview Copyright 2012 Pearson Addison-Wesley. All rights reserved. Preview Goals of macroeconomic policies internal and external balance Gold

More information

Exam Number. Section

Exam Number. Section Exam Number Section MACROECONOMICS IN THE GLOBAL ECONOMY Core Course Professor Antonio Fatás Final Exam February 24, 2011 9:00-12:00 Instructions: (PLEASE READ) SUGGESTED ANSWERS Space to answer the questions

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Econ 330 Spring 2015: FINAL EXAM Name ID Section Number MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Suppose a report was released today that

More information

ECO 209Y MACROECONOMIC THEORY AND POLICY

ECO 209Y MACROECONOMIC THEORY AND POLICY Department of Economics Prof. Gustavo Indart University of Toronto March 14, 2007 ECO 209Y MACROECONOMIC THEORY AND POLICY SOLUTION Term Test #3 LAST NAME FIRST NAME STUDENT NUMBER Circle the section of

More information

1. Generation One. 2. Generation Two. 3. Sudden Stops. 4. Banking Crises. 5. Fiscal Solvency

1. Generation One. 2. Generation Two. 3. Sudden Stops. 4. Banking Crises. 5. Fiscal Solvency Currency Crises 1. Generation One 2. Generation Two 3. Sudden Stops 4. Banking Crises 5. Fiscal Solvency 1 Generation One 1.1 Monetary and Fiscal Policy Initial position long-run equilibrium purchasing

More information

Chapter 12 Aggregate Demand II: Applying the IS -LM Model

Chapter 12 Aggregate Demand II: Applying the IS -LM Model Chapter 12 Aggregate Demand II: Applying the IS -LM Model Modified by un Wang Eco 3203 Intermediate Macroeconomics Florida International University Summer 2017 2016 Worth Publishers, all rights reserved

More information

The Asian Financial Crisis

The Asian Financial Crisis The Asian Financial Crisis The Asian crisis 1996 Miraculous growth in EA But some signs of worsening current accounts in Korea and Thailand Signs of worsening financial institutions in Thailand 1997 January

More information

Answers to Questions: Chapter 7

Answers to Questions: Chapter 7 Answers to Questions in Textbook 1 Answers to Questions: Chapter 7 1. Any international transaction that creates a payment of money to a U.S. resident generates a credit. Any international transaction

More information

Suggested Solutions to Problem Set 6

Suggested Solutions to Problem Set 6 Department of Economics University of California, Berkeley Spring 2006 Economics 182 Suggested Solutions to Problem Set 6 Problem 1: International diversification Because raspberries are nontradable, asset

More information

CAPITAL FLOWS: EMERGING ISSUES Guillermo A. Calvo University of Maryland Bogota, October 1, 1997

CAPITAL FLOWS: EMERGING ISSUES Guillermo A. Calvo University of Maryland Bogota, October 1, 1997 CAPITAL FLOWS: EMERGING ISSUES Guillermo A. Calvo University of Maryland Bogota, October 1, 1997 I. Recent Currency Crises A salient fact of Mexico s and Thailand s recent currency crises is the active

More information

Chapter 13. Introduction. Goods Market Equilibrium. Modeling Strategy. Nominal Exchange Rate: A Convention. The Nominal Exchange Rate

Chapter 13. Introduction. Goods Market Equilibrium. Modeling Strategy. Nominal Exchange Rate: A Convention. The Nominal Exchange Rate Introduction Chapter 13 Open Economy Macroeconomics Our previous model has assumed a single country exists in isolation, with no trade or financial flows with any other country. This chapter relaxes the

More information

University of Toronto January 25, 2007 ECO 209Y MACROECONOMIC THEORY. Term Test #2 L0101 L0201 L0401 L5101 MW MW 1-2 MW 2-3 W 6-8

University of Toronto January 25, 2007 ECO 209Y MACROECONOMIC THEORY. Term Test #2 L0101 L0201 L0401 L5101 MW MW 1-2 MW 2-3 W 6-8 Department of Economics Prof. Gustavo Indart University of Toronto January 25, 2007 SOLUTION ECO 209Y MACROECONOMIC THEORY Term Test #2 LAST NAME FIRST NAME STUDENT NUMBER Circle your section of the course:

More information

POLICY PRESCRIPTIONS FOR EAST ASIA

POLICY PRESCRIPTIONS FOR EAST ASIA POLICY PRESCRIPTIONS FOR EAST ASIA Masaru Yoshitomi* At the Asian Development Bank Institute in Tokyo, we recently produced policy recommendations about how to avoid another financial crisis and, if we

More information

International Linkages and Domestic Policy

International Linkages and Domestic Policy International Linkages and Domestic Policy 11 Unit highlights: The basis of and gains from international trade Concept of absolute advantage and comparative advantage Balance of paymets Exchange rate system

More information

Chapter 5. Saving and Investment in the Open Economy. Copyright 2009 Pearson Education Canada

Chapter 5. Saving and Investment in the Open Economy. Copyright 2009 Pearson Education Canada Chapter 5 Saving and Investment in the Open Economy Copyright 2009 Pearson Education Canada Balance of Payments Accounting The balance of payments accounts are the record of country s international transactions.

More information

Use the following to answer question 15: AE0 AE1. Real expenditures. Real income. Page 3

Use the following to answer question 15: AE0 AE1. Real expenditures. Real income. Page 3 Chapter 10 1. An example of an autonomous consumption policy is a policy that A) lowers tax rates to stimulate additional consumer spending. B) makes credit more widely available to consumers in order

More information

University of Toronto July 27, 2006 ECO 209Y - L5101 MACROECONOMIC THEORY. Term Test #2 DO NOT WRITE IN THIS SPACE. Part I /30.

University of Toronto July 27, 2006 ECO 209Y - L5101 MACROECONOMIC THEORY. Term Test #2 DO NOT WRITE IN THIS SPACE. Part I /30. Department of Economics Prof. Gustavo Indart University of Toronto July 27, 2006 SOLUTION ECO 209Y - L5101 MACROECONOMIC THEORY Term Test #2 LAST NAME FIRST NAME INSTRUCTIONS: STUDENT NUMBER 1. The total

More information

Other similar crisis: Euro, Emerging Markets

Other similar crisis: Euro, Emerging Markets Session 15. Understanding Macroeconomic Crises. Mexican Crisis 1994-95 Other similar crisis: Euro, Emerging Markets Global Scenarios 2017-2021 The Mexican Peso Crisis in 1994: Background An economy that

More information

To Fix or Not to Fix?

To Fix or Not to Fix? To Fix or Not to Fix? Linda Tesar, Department of Economics Notes at: http://www.econ.lsa.umich.edu/~ltesar April 5, 2000 Fixed vs. Flexible Exchange rates The Theory: Money demand: M/P = L(Y,I) Interest

More information

EconS 327 Test 2 Spring 2010

EconS 327 Test 2 Spring 2010 1. Credit (+) items in the balance of payments correspond to anything that: a. Involves payments to foreigners b. Decreases the domestic money supply c. Involves receipts from foreigners d. Reduces international

More information

Challenges of financial globalisation and dollarisation for monetary policy: the case of Peru

Challenges of financial globalisation and dollarisation for monetary policy: the case of Peru Challenges of financial globalisation and dollarisation for monetary policy: the case of Peru Julio Velarde During the last decade, the financial system of Peru has become more integrated with the global

More information

14.02 Principles of Macroeconomics Problem Set #4 - Answers

14.02 Principles of Macroeconomics Problem Set #4 - Answers 4.02 Principles of Macroeconomics Problem Set #4 - Answers Due during Week # 9 PART I. TRUE/FALSE/UNCERTAIN. As in microeconomics, the AD-curve is downward sloping since consumers buy less goods when they

More information

Policy Discussion Assignment 3

Policy Discussion Assignment 3 Management 495 Spring 2015 Topics in Finance: International Macroeconomics Policy Discussion Assignment 3 May 19, 2015 Due: Instructor: E-mail: Fri, June 5 before 6:00pm Marc-Andreas Muendler muendler@ucsd.edu

More information

Chapter 6. Government Influence on Exchange Rates. Lecture Outline

Chapter 6. Government Influence on Exchange Rates. Lecture Outline Chapter 6 Government Influence on Exchange Rates Lecture Outline Exchange Rate Systems Fixed Exchange Rate System Freely Floating Exchange Rate System Managed Float Exchange Rate System Pegged Exchange

More information

FETP/MPP8/Macroeconomics/Riedel. General Equilibrium in the Short Run II The IS-LM model

FETP/MPP8/Macroeconomics/Riedel. General Equilibrium in the Short Run II The IS-LM model FETP/MPP8/Macroeconomics/iedel General Equilibrium in the Short un II The -LM model The -LM Model Like the AA-DD model, the -LM model is a general equilibrium model, which derives the conditions for simultaneous

More information

UNIVERSITY OF TORONTO Faculty of Arts and Science. April Examination 2016 ECO 209Y. Duration: 2 hours

UNIVERSITY OF TORONTO Faculty of Arts and Science. April Examination 2016 ECO 209Y. Duration: 2 hours UNIVERSITY OF TORONTO Faculty of Arts and Science April Examination 2016 ECO 209Y Duration: 2 hours Examination Aids allowed: Non-programmable calculators only LAST NAME FIRST NAME STUDENT NUMBER DO NOT

More information

International Monetary Relations

International Monetary Relations Part 1: Review the following multiple choice questions to check your understanding of the balance of payments and foreign exchange rates. Question 1: On the balance-of-payments statements, merchandise

More information

University of Toronto December 3, 2010 ECO 209Y MACROECONOMIC THEORY AND POLICY. Term Test #2 L0101 L0301 L0401 M 2-4 W 2-4 R 2-4

University of Toronto December 3, 2010 ECO 209Y MACROECONOMIC THEORY AND POLICY. Term Test #2 L0101 L0301 L0401 M 2-4 W 2-4 R 2-4 Department of Economics Prof. Gustavo Indart University of Toronto December 3, 2010 ECO 209Y MACROECONOMIC THEORY AND POLICY SOLUTIONS Term Test #2 LAST NAME FIRST NAME STUDENT NUMBER Circle your section

More information

Prepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld

Prepared by Iordanis Petsas To Accompany. by Paul R. Krugman and Maurice Obstfeld Chapter 22 Developing Countries: Growth, Crisis, and Reform Prepared by Iordanis Petsas To Accompany International Economics: Theory and Policy, Sixth Edition by Paul R. Krugman and Maurice Obstfeld Chapter

More information

Suggested Solutions Assignment 4 (OPTIONAL)

Suggested Solutions Assignment 4 (OPTIONAL) EC 3580 International Economics II Instructor: Sharif F. Khan Department of Economics Atkinson College, York University S1 2008 Suggested Solutions Assignment 4 (OPTIONAL) Total Marks: 50 Part A True/

More information

The International Financial System

The International Financial System The International Financial System Notes on Mishkin, Chapter 21 Leigh Tesfatsion Economics Department Iowa State University, Ames IA Last Revised: 27 April 2011 Key In-Class Discussion Questions Mishkin,

More information

Chapter 22 (11) Developing Countries: Growth, Crisis, and Reform

Chapter 22 (11) Developing Countries: Growth, Crisis, and Reform Chapter 22 (11) Developing Countries: Growth, Crisis, and Reform Preview Snapshots of rich and poor countries Characteristics of poor countries Borrowing and debt in poor and middle-income economies The

More information

SOLUTIONS. ECO 209Y - L5101 MACROECONOMIC THEORY Term Test 2 LAST NAME FIRST NAME STUDENT NUMBER. University of Toronto January 26, 2005 INSTRUCTIONS:

SOLUTIONS. ECO 209Y - L5101 MACROECONOMIC THEORY Term Test 2 LAST NAME FIRST NAME STUDENT NUMBER. University of Toronto January 26, 2005 INSTRUCTIONS: Department of Economics Prof. Gustavo Indart University of Toronto January 26, 2005 SOLUTIONS ECO 209Y - L5101 MACROECONOMIC THEORY Term Test 2 LAST NAME FIRST NAME INSTRUCTIONS: STUDENT NUMBER 1. The

More information

Prices and Output in an Open Economy: Aggregate Demand and Aggregate Supply

Prices and Output in an Open Economy: Aggregate Demand and Aggregate Supply Prices and Output in an Open conomy: Aggregate Demand and Aggregate Supply chapter LARNING GOALS: After reading this chapter, you should be able to: Understand how short- and long-run equilibrium is reached

More information

Dr. Lee Jang Yung Senior Deputy Governor Financial Supervisory Service Korea

Dr. Lee Jang Yung Senior Deputy Governor Financial Supervisory Service Korea Bank of Indonesia and IMF Joint Conference on Coping with Asia s Large Capital Inflows in a Multi-Speed Global Economy How Should Emerging Market Countries Respond? Korea s Experience March 11, 2011 Dr.

More information

Financial Instability and Overvaluation of the Exchange Rate in Latin America: Analysis and Policy Recommendations

Financial Instability and Overvaluation of the Exchange Rate in Latin America: Analysis and Policy Recommendations Brazilian Journal of Political Economy, vol. 31, nº 5 (125), pp. 833-837, Special edition 2011 the project: Financial Instability and Overvaluation of the Exchange Rate in Latin America: Analysis and Policy

More information

Chapter 22 THE MUNDELL-FLEMING MODEL WITH PARTIAL INTERNATIONAL CAPITAL MOBILITY

Chapter 22 THE MUNDELL-FLEMING MODEL WITH PARTIAL INTERNATIONAL CAPITAL MOBILITY Chapter 22 THE MUNDELL-FLEMING MODEL WITH PARTIAL INTERNATIONAL CAPITAL MOBILITY This chapter extends the Keynesian model to allow for international trade in assets in the context of fixed exchange rates

More information

EC202 Macroeconomics

EC202 Macroeconomics EC202 Macroeconomics Koç University, Summer 2014 by Arhan Ertan Study Questions 4 1. Assume that the LM curve for a small open economy with a floating exchange rate is given by Y = 200r 200 + 2(M/P), while

More information

ECO209Y MACROECONOMIC THEORY Solution to Problem Set 8 (Odd numbers only)

ECO209Y MACROECONOMIC THEORY Solution to Problem Set 8 (Odd numbers only) Prof. Gustavo Indart Department of Economics University of Toronto ECO209Y MACROECONOMIC THEORY Solution to Problem Set 8 (Odd numbers only) 1. a) First we find the IS curve. The AE curve is: AE = C +

More information

Reforming the International Financial Institutions: A Plan for Financial Stability and Economic Development

Reforming the International Financial Institutions: A Plan for Financial Stability and Economic Development http://usinfo.state.gov/jounmls/ites/0201/ijee/ifis-meltzer.htm Reforming the International Financial Institutions: A Plan for Financial Stability and Economic Development By Allan H.Meltzer Professor

More information

Monetary Policy. Image Source: Wikimedia Commons

Monetary Policy. Image Source: Wikimedia Commons Monetary Policy Image Source: Wikimedia Commons You may have heard about the Federal Reserve from the news, such as when it adjusts interest rates or starts to buy bonds to increase the money supply. Federal

More information

5. An increase in government spending is represented as a:

5. An increase in government spending is represented as a: Romer Section 1 1. The IS curve represents combinations of Y and r that: a. are consistent with equilibrium in the money market. b. are consistent with equilibrium in the goods market. c. are positively

More information

Simultaneous Equilibrium in Output and Financial Markets: The Short Run Determination of Output, the Exchange Rate and the Current Account

Simultaneous Equilibrium in Output and Financial Markets: The Short Run Determination of Output, the Exchange Rate and the Current Account Fletcher School, Tufts University Simultaneous Equilibrium in Output and Financial Markets: The Short Run Determination of Output, the Exchange Rate and the Current Account Prof. George Alogoskoufis The

More information

TWO VIEWS OF THE ECONOMY

TWO VIEWS OF THE ECONOMY TWO VIEWS OF THE ECONOMY Macroeconomics is the study of economics from an overall point of view. Instead of looking so much at individual people and businesses and their economic decisions, macroeconomics

More information

10 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapt er. Key Concepts. Aggregate Supply1

10 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapt er. Key Concepts. Aggregate Supply1 Chapt er 10 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Aggregate Supply1 Key Concepts The aggregate supply/aggregate demand model is used to determine how real GDP and the price level are determined and why

More information

UNIVERSITY OF TORONTO Faculty of Arts and Science. August Examination 2013 ECO 209Y. Duration: 2 hours

UNIVERSITY OF TORONTO Faculty of Arts and Science. August Examination 2013 ECO 209Y. Duration: 2 hours UNIVERSITY OF TORONTO Faculty of Arts and Science August Examination 2013 ECO 209Y Duration: 2 hours Examination Aids allowed: Non-programmable calculators only LAST NAME FIRST NAME STUDENT NUMBER DO NOT

More information

The Impact of an Increase In The Money Supply and Government Spending In The UK Economy

The Impact of an Increase In The Money Supply and Government Spending In The UK Economy The Impact of an Increase In The Money Supply and Government Spending In The UK Economy 1/11/2016 Abstract The international economic medium has evolved in the direction of financial integration. In the

More information

Export Group Meeting on the Contribution and Effective Use of External Resources for Development, in Particular for Productive Capacity Building

Export Group Meeting on the Contribution and Effective Use of External Resources for Development, in Particular for Productive Capacity Building Export Group Meeting on the Contribution and Effective Use of External Resources for Development, in Particular for Productive Capacity Building 22-24 February 21 Debt Sustainability and the Implications

More information

ECNS Fall 2009 Practice Examination Opportunity

ECNS Fall 2009 Practice Examination Opportunity ECNS 202 -- Fall 2009 Practice Examination Opportunity Mark the answer on the provided scantron sheet using a #2 lead pencil. Erase completely. I am not responsible for poorly marked or poorly erased asnwers.

More information

External Factors, Macro Policies and Growth in LAC: Is Performance that Good?

External Factors, Macro Policies and Growth in LAC: Is Performance that Good? External Factors, Macro Policies and Growth in LAC: Is Performance that Good? Alejandro Izquierdo IADB Emerging Powers in Global Governance Conference Paris, July 6, 2007 (based on work with Ernesto Talvi)

More information

Helpful Hint Fiscal Policy and the AS-AD Model

Helpful Hint Fiscal Policy and the AS-AD Model Helpful Hint Fiscal Policy and the AS-AD Model In this Helpful Hint, we analyze the effects of a change in fiscal policy using the AS-AD model. In doing so, it is useful to consider a specific example.

More information

The Mundell-Fleming model

The Mundell-Fleming model The Mundell-Fleming model dr hab. Bartłomiej Rokicki Chair of Macroeconomics and International Trade Theory Faculty of Economic Sciences, University of Warsaw Main assumptions of the model Small open economy

More information

Chapter 29 The Global Economy and Policy Principles of Economics in Context (Goodwin et al)

Chapter 29 The Global Economy and Policy Principles of Economics in Context (Goodwin et al) Chapter 29 The Global Economy and Policy Principles of Economics in Context (Goodwin et al) Chapter Overview This chapter will take you through the basics of international trade and finance. The chapter

More information

INSTRUCTIONS: READ CAREFULLY!!!

INSTRUCTIONS: READ CAREFULLY!!! Form 1 Name: Section No.: UM ID No.: GSI: Form : Economics 102 Introduction to Macroeconomics Prof. Alan Deardorff Final Exam April 25, 2002 INSTRUCTIONS: READ CAREFULLY!!! 1. Please do not open the exam

More information

International Finance

International Finance International Finance 19 1 Balance of Payments International economic transactions Flow of transactions period of time May not involve cash payments Double-entry bookkeeping Credits Inflow of receipts

More information

Final Examination Semester 2 / Year 2012

Final Examination Semester 2 / Year 2012 Final Examination Semester 2 / Year 2012 COURSE : MACROECONOMICS COURSE CODE : ECON1013 TIME : 2 1/2 HOURS DEPARTMENT : MANAGEMENT LECTURER : CHING YANN PENG Student s ID : Batch No. : Notes to candidates:

More information

Question 5 : Franco Modigliani's answer to Simon Kuznets's puzzle regarding long-term constancy of the average propensity to consume is that : the ave

Question 5 : Franco Modigliani's answer to Simon Kuznets's puzzle regarding long-term constancy of the average propensity to consume is that : the ave DIVISION OF MANAGEMENT UNIVERSITY OF TORONTO AT SCARBOROUGH ECMCO6H3 L01 Topics in Macroeconomic Theory Winter 2002 April 30, 2002 FINAL EXAMINATION PART A: Answer the followinq 20 multiple choice questions.

More information