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1.
a)define and explain the so-called "marshall-lerner" condition, and assuming this condition holds, explain the relationship between the foreign-exchange ("forex") market and the balance-of-payments (BoP) under both flexible- and pegged-rate policy regimes; and
b) explain the general- i.e. upward-sloping – form of the FE curve and explain how it shifts, under a flexible-rate regime, when there is a BoP deficit.
2.
Under "cpm" (perfect capital mobility), discuss the following contractionary policy effects a "Small" country’s income, money supply, interest rate, and exchange rate when the small country pursues: a) a flexible rate policy; and b) a pegged-rate policy
i) an increase in taxes in the small country;
ii) a reduction in the quantity of money in the small country;
iii) an increase in a "large" trading country’s taxes; and,
iv) a decrease in the "large" country’s money supply
3. Describe and discuss the conditions pertaining to long-run equilibrium in an international (2-country) context. use this model to explain at least two of the variants commonly known as "purchasing-power-parity" approaches to exchange-rate movements. what happens if the exchange-rate is pegged and the money supply and/or income in the "home" country changes?
4. explain the meaning of the so-called "interest-parity" condition, and use it in constructing a model of the effects of a monetary expansion (in a small country) which is: a) "temporary" ; and b) "permanent". Go on to explain the meaning of the "AA/DD" diagramatic framework and show these same effects using that model.
[meteor_slideshow slideshow=”arp2″]
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