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    ECN209 - International Finance

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    Past paper

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    ECN209 - International Finance

    Uploaded by

    ham
    188 views4 pages
    Past paper

    Copyright

    © © All Rights Reserved

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    Past paper

    Copyright:

    © All Rights Reserved
    188 views4 pages

    ECN209 - International Finance

    Uploaded by

    ham
    Past paper

    Copyright:

    © All Rights Reserved
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    The key takeaways are that this exam paper covers international finance topics like exchange rates, current accounts, and macroeconomic policy tools. It evaluates students' understanding of concepts through true/false statements and diagrammatic analysis of models.

    The 4 statements being evaluated in Section A are: 1) Whether a real exchange rate depreciation leads to a current account surplus, 2) Whether a current account deficit means a country's net foreign wealth is increasing, 3) Whether fiscal policy is more effective under fixed versus flexible exchange rates, and 4) The conditions under which a country can achieve internal and external balance under the Bretton Woods system.

    Question 5 describes an exchange rate scenario where 1 US Dollar buys 8.65 Argentinian Pesos and 2.78 Brazilian Reals. It asks about the equilibrium Peso/Real rate, the effects of depreciations, and whether an arbitrage opportunity exists given a stated Peso/Real rate.

    BSc.

    (Econ) by course unit

    Monday 27th April 2015, 14:30 - 16:30

    ECN209 International Finance Duration: 2 hours

    YOU ARE NOT PERMITTED TO READ THE CONTENTS OF THIS QUESTION PAPER UNTIL
    INSTRUCTED TO DO SO BY AN INVIGILATOR

    Answer ALL questions from BOTH sections

    Calculators are permitted in this examination. Please state on your answer book the name and type
    of machine used.

    Complete all rough workings in the answer book and cross through any work that is not to be
    assessed.

    Possession of unauthorised material at any time when under examination conditions is an


    assessment offence and can lead to expulsion from QMUL. Check now to ensure you do not have
    any notes, mobile phones, smartwatches or unauthorised electronic devices on your person. If you
    do, raise your hand and give them to an invigilator immediately. It is also an offence to have any
    writing of any kind on your person, including on your body. If you are found to have hidden
    unauthorised material elsewhere, including toilets and cloakrooms it will be treated as being found in
    your possession. Unauthorised material found on your mobile phone or other electronic device will
    be considered the same as being in possession of paper notes. A mobile phone that causes a
    disruption in the exam is also an assessment offence.

    EXAM PAPERS MUST NOT BE REMOVED FROM THE EXAM ROOM

    Examiner: Andrea Tesei

    © Queen Mary, University of London, 2015


    Page 2 ECN209 (2015)

    SECTION A

    Answer True, False or Uncertain to the following 4 statements (questions 1-4). Briefly
    explain your answers, and make use of the appropriate equations where needed. No credit
    will be given without explanation.

    Question 1

    A real exchange rate depreciation leads to a current account surplus.

    [10 marks]

    Question 2

    If a country has a current account deficit then the country’s net foreign wealth is increasing.

    [10 marks]

    Question 3

    Fiscal policy is a more effective tool to influence output when the exchange rate is fixed
    rather than when it is flexible.

    [10 marks]

    Question 4

    Under the Bretton Woods System, an individual country (other than the United States) with
    underemployment and excessive current account deficit could achieve both internal balance
    and external balance only by implementing expansionary fiscal policy. [Diagrams required]

    [10 marks]
    ECN209 (2015) Page 3

    SECTION B

    Answer ALL questions

    Question 5

    Suppose that a U.S. Dollar costs 8.65 Argentinian Peso, but the same Dollar can be
    purchased for 2.78 Brazilian Real.

    a) What is the Peso/Real exchange rate in equilibrium?

    [3 marks]

    b) Suppose that the Argentinian Peso depreciates by 10% against the Dollar and the
    Brazilian Real depreciates by 5% against the Dollar. What is the new Peso/Real exchange
    rate in equilibrium? Which one of the two currencies has depreciated against the other?

    [3 marks]

    c) Now suppose that the exchange rate between the Dollar and the Peso and the Dollar
    and the Real is the same as in point a) of this question. However, suppose that a Real costs
    4 Pesos. Is there an arbitrage opportunity here? If so, explain exactly what are the
    transactions you would perform in order to make riskless profits by investing an initial 100
    U.S. Dollar amount.

    [4 marks]

    Question 6

    Consider the AA-DD model we have studied in class. Suppose the economy begins at its
    long-run level with output at its full-employment level and the home current account at some
    given level X.

    Compare and explain the short-run effects on home output, the home current account, and
    the nominal exchange rate of the following two temporary policies by the home government.
    Use the AA-DD-XX diagram to support your answers.

    a) An increase in home money supply under flexible exchange rates and under fixed
    exchange rates

    [10 marks]

    b) A decrease in the home government taxes under flexible exchange rates and under
    fixed exchange rates
    [15 marks]

    Turn Over
    Page 4 ECN209 (2015)

    Question 7

    Consider the asset approach to exchange rate determination for the U.S., assuming that
    prices are sticky in the short-run. Suppose there is a permanent increase in the U.S.
    aggregate money demand.

    a) Explain and illustrate graphically the short-run response of the Dollar interest rate
    and the Dollar/Euro exchange rate.
    [15 marks]

    b) Assume that prices are flexible in the long-run. Explain and illustrate graphically the
    long-run response of the Dollar interest rate, the price level and the Dollar/Euro
    exchange rate.
    [10 marks]

    End of Paper

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