In writing your responses to your chosen topics, please be as detailed and original in supporting your points as possible. Illustrate with examples and graphs when appropriate.
Choose four (and only four) of the following eight topics. Allocate 1 – 1.25 page per topic, exclusive of the question, inclusive of diagrams if applicable.
Find the detailed study guide for the exam attached. Please don’t hesitate to contact me if you have any concerns.
1. Covered interest differentials and covered interest parity. What motivates covered (as opposed to uncovered) borrowing and investing strategy in international finance? Show how market forces tend to cause the covered interest differential to converge to zero, and what can prevent absolute convergence to zero?
2. How has the Corona virus affected emerging market economies, in terms of their output, attractiveness for foreign investment, and exchange rates against the US dollar? What is the strongest economic argument for making loans and aid available to these countries during the crisis?
3. What are the advantages for an emerging market to be a foreign direct investment host country? In your answer, address the incentives for good economic governance, advantages over other forms of capital flows, trade, domestic savings and investment, and economic growth. Describe any potential negative effects of FDI.
4. Some U.S. opponents to trade claim that a trade deficit automatically leads to an overall increase in unemployment. Using your knowledge of the balance of payments, trace through the financial effects of an increase in imports on the U.S. economy. To what extent will the U.S. be able to run a trade deficit without increasing unemployment? Do all countries have this ability?
5. Suppose there is an increase in national income (Y). Illustrate how the increase in Y will affect the home economy in the income adjustment, and in the monetary approach, to the BoP. Use graphs and/or numerical examples to illustrate. How do the conclusions of the two theoretical approaches differ?
6. Based on the article by Stefan Zweig on the German hyperinflation, describe how this event affected prices, the nature of economic exchange, income distribution, and lifestyle at the time. What role did foreign exchange play in the German hyperinflation? What economic policy was required to end the crisis?
7. Show how price elasticities of import and export demand affect the ability of a home country to improve its BoP with a devaluation. Illustrate you answer with a graph of a typical home export good and how the devaluation affects foreign exchange revenues earned. What does this graph imply about the J-curve?
8. Euro Crisis. Show how the introduction of the Euro contributed to the financial crisis in Greece. What role did the absence of economic “shock absorbers” play in the crisis? Despite the crisis, why did most Greeks favor the continued use of the Euro, instead of their legacy currency, the Drachma? What must happen to improve the functioning of the Euro system?
