Oct 16, 2017 term paper 2

Explain What was the Credibility Theory of the EMS

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  • What is the goal of external balance?
  • Is Europe an optimum currency area?
  • Following the questions:

    1)Why do governments prefer to avoid current account deficits that are too large?

     

    2)Explain why under the gold standard a perpetual surplus or a perpetual deficit is impossible.

     

    3)Describe the effects of the Smoot-Hawley tariff imposed by the United States in 1930.

     

    4)Explain why the United States dollar became the postwar world’s key currency.

     

    5)Explain how a country with a current account deficit is a ripe candidate for currency devaluation.

     

    6) Assume that the government has a target value, X, for the current account surplus.

    (a) What is the goal of external balance?

    (b) Assume that we are dealing with only the short run, what are the values of P and P*?

    (c) Given fixed P and P*, what would happen if E rises?

    (d) Given P and P*, what would happen if T decreases, i.e., an expansionary fiscal policy?

    (e) Given P and P*, what would happen if G increases, i.e., an expansionary fiscal policy?

    (f) Given all of the above, what is the relation between the exchange rate, E, and fiscal ease, i.e., an increase in G or a reduction in T?

    (g) Assume that the economy is in external balance. What will happen if the government maintains its current account at X, but devaluates the domestic currency?

    (h) Assume that the economy is at external balance. What will happen if the government raises E?

    (i) Assume that the economy is at external balance. What will happen if the government lowers E?

     

    7) Explain what was the credibility theory of the EMS.

     

    8) Why did the EU countries move away from the EMS toward the goal of a single shared currency?

     

    9) Explain why the oil price shocks after 1973 made countries unwilling to revive the Bretton Woods system of fixed exchange rates. See also Chapter 19.

     

    10) Is Europe an optimum currency area?

     

    11) Explain why the European Union’s current combination of rapid capital migration with limited labor migration may actually raise the cost of adjusting to product market shocks without exchange rate change?


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