Problem 2
What are the advantages and disadvantages of a currency board?
Problem 3
Common fallacies Why are these statements wrong? (a) Floating exchange rates make sure that exports and imports always balance. (b) Fixed exchange rate regimes prevent necessary changes in competitiveness.
Problem 4
If floating is so great, why did most EU countries join a monetary union in \(1999 ?\)
Problem 4
Use an IS-LM diagram to show what happened to the UK in 1992 after it left the Exchange Rate Mechanism.
Problem 5
Which of the following statements are correct? Some countries in the Eurozone have suffered speculative attack in 2010 because (a) interest rates have been unnecessarily high; (b) they have been unable to devalue to boost growth and tax revenues; (c) they can put pressure on richer Eurozone countries to bail them out; (d) they cannot use inflation as a weapon of last resort for deflating away government debt.
Problem 6
During the First World War the gold standard was suspended. To pay for the war, Britain printed money and sold off its foreign assets. What do you think happened in 1925 when Britain tried to rejoin the gold standard at the old nominal exchange rate?
Problem 7
Contrast the dollar standard and the gold standard in terms of the automatic adjustment mechanism.
Problem 10
Again, you are Finance Minister of Cuba in the new government that has decided, to abandon five decades of communism and move as rapidly as possible to a free market. (a) From now on, will Cuba offer unusually good or unusually bad investment opportunities? (b) What will happen if Cuba pursues a fixed exchange rate policy during this period? (c) What will happen if Cuba follows a floating exchange rate policy? (d) Which of the two would you recommend?
Problem 12
Essay question 'Small open economies need fixed exchange rates; large economies need floating exchange rates.' Is this broad generalization correct? Explain why or why not.
Problem 13
In 2010 , Ireland implemented a deliberate policy of linking pay rises to efficiency to induce deflation. (a) How did Ireland plan to achieve deflation by implementing such a policy? (b) Use an IS-LM diagram to show the consequences of negative inflation in Ireland.
