EC3343 Tutorial 7

Q1. Consider a country with a flexible exchange rate regime. Assume that the
economy is initially at full employment. Suppose the government imposes a tariff on
all imports. Use the DD-AA model to analyse the short run effects of a temporary tariff.
Illustrate with graphs and explain.

Q2. Assume an economy is initially at full employment. Using the DD-AA model,
analyse the output and current account effects of a temporary import tariff under a
fixed exchange rate regime in the short run. Show with graphs and explain. What
would happen if all countries in the world simultaneously raise import tariffs?

Q3. Suppose a foreign country has a flexible exchange rate regime and the domestic
country has a fixed exchange rate regime. In both countries, there is free capital
mobility. Suppose the central bank in the foreign country has implemented one round
of bond purchase in their money market. Explain the effects in the foreign country and
show how the domestic country will respond.

Q4. Suppose a foreign country has a fixed exchange rate regime and the domestic
country has a flexible exchange rate regime. In both countries, there is free capital
mobility. Suppose the foreign country has implemented fiscal expansion. Explain the
effects in the foreign country and show how the domestic country will respond.

Q5. The 2008 Global Financial Crisis has brought negative output shocks in countries
around the globe. Consider the case of Ireland and Iceland. Explain graphically why
the different exchange rate systems in the two countries can make a difference to their
recovery paths.

Q6. The People’s Bank of China (PBoC) is confronted with a permanent current
account and capital account surpluses from 2000 to 2010. To control the money supply
and prevent inflation, it uses two tools to sterilize the foreign currency inflows:
(i) the variation of Required Reserve Ratio (which obliges the banks to make
a deposit to the Central Bank where the amount of the deposit corresponds
to a percentage of the credits they grant), and
(ii) the selling of “Central Bank Bills”.

Elaborate and explain the pros and cons of each type of intervention.

Biblography

Ma, Guonan, Yan Xiandong, and Liu Xi. "China’s evolving reserve
requirements." Journal of Chinese Economic and Business Studies 11, no. 2 (2013):
117-137. https://www.bis.org/publ/work360.pdf