HE206

NANYANG TECHNOLOGICAL UNIVERSITY

SEMESTER 2 EXAMINATION 2005-2006


HE206 - International Monetary Economics


April/May 2006 Time Allowed: 2 hours


INSTRUCTIONS

1 This paper contains FIVE(5) questions and comprises THREE(3) pages.

2 Answer any FOUR(4) questions.

3 The number of marks allocated is shown at the end of each question.

4 Begin your answer to each question on a separate page of the answer book.

5 Answers will be graded for content and appropriate presentation.



Question 1

(a) Assuming interest parity condition and flexible exchange rate, analyze the short-
run impact of a decrease in money demand on interest rate and exchange rate with
a diagram. What happens if the reduction is a temporary phenomenon? What
happens if the phenomenon is a permanent one? What is the long-run impact of
the permanent decrease in money demand? (10 marks)

(b) Assuming interest parity condition and flexible exchange rate, analyze with a
diagram the short-run impact on interest rate and exchange rate of an
unanticipated permanent increase in money supply. What happens to the short-run
impact if money demand also rises simultaneously in response to an increase in
output following the increase in money supply? Is it possible to have an
undershooting of exchange rate? (15 marks)


(TOTAL: 25 marks)



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Question 2

(a) What are the two adjustment mechanisms to restore external balance under the
gold standard? Explain briefly the adjustment mechanisms. (7 marks)

(b) Explain and discuss the contradictions within the Bretton Woods System that led
to the collapse of the system in 1973. (8 marks)

(c) To what extent does the Generalized Floating Exchange Rate System after 1973
an improvement over the Bretton Woods System? Discuss. (10 marks)

(TOTAL: 25 marks)


Question 3

(a) A Filipino maid lost her purse during her trip to meet her friends in the Botanic
Garden last Sunday. There were notes of S$50 and US$45 in her purse.
Theoretically, how should you, as an economic statistician make appropriate
entries in the Singapore balance of payments? In practice, what should you do?
(10 marks)

(b) Current account deficits may be perceived from various angles. It is up to ones
interpretation. Discuss with examples from actual experiences. (15 marks)

(TOTAL: 25 marks)


Question 4

(a) Does it really matter whether an increase in nominal interest rate is caused by a
rise in real interest rate or a rise in the expected inflation? Discuss and illustrate
with diagrams the implications of the above on exchange rate. (10 marks)


(b) Using DD-AA-XX model, compare and contrast the impact of a permanent fiscal
expansion under the fixed and floating exchange rate systems on output, exchange
rate and current account balance. (15 marks)

(TOTAL: 25 marks)


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Question 5

(a) Explain briefly the problems of original sin and moral hazard in international
lending. (7 marks)

(b) Explain what are the monetary efficiency gain (GG schedule) and economic
stability loss (LL schedule) in the theory of optimum currency areas. (8 marks)

(c) Using the GG and LL schedules, evaluate and discuss whether the European
Union is an optimum currency area? (10 marks)

(TOTAL: 25 marks)







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