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1. If you were in charge of macroeconomic policies in a small open economy, what qualitative effect would each of the following events have on your target for external balance?
a. Large deposits of uranium are discovered in the interior of your country.
b. The world price of your main export good, copper, rises permanently.
c. The world price of copper rises temporarily.
d. There is a temporary rise in the world price of oil
2. Under a gold standard, countries may adopt excessively contractionary monetary policies as all countries scramble in vain for larger share of the limited supply of world gold reserves. Can the same problem arise under a reserve currency standard when bonds denominated in different currencies are all perfect substitutes?
3. A central bank that adopts a fixed exchange rate may sacrifice its autonomy in setting domestic monetary policy. It is sometimes argued that when this is the case, the central bank also gives up the ability to use monetary policy to combat the wage-price spiral. The argument goes like this: Suppose the workers demand higher wages and employers give in, but that the employers then raise output prices to cover their higher costs. Now the price level is higher and the real balances are momentarily lower, so to prevent an interest rate rise that would appreciate the currency, the central bank must buy foreign exchange and expand the money supply. This action accommodates the initial wage demands with money growth and the economy moves permanently to a higher level of wages and prices. With a fixed exchange rate there is thus no way on keeping wages and prices down”. What is wrong with this argument?
4. Imagine a world of two countries in which the only causes of fluctuations in stock prices are unexpected shifts in monetary policies. Under which exchange rate regime would the gains from international asset trade be greater, fixed, or floating?
5. The text points out that covered interest parity holds quite closely for deposits of differing currency denominations issued in a single financial center. Why might covered interest parity fail to hold when deposits issued in different financial centers are compared?
6. When a U.S bank accepts a deposit from one of its foreign branches, that deposit is subject to the Fed’s reserve requirements. Similarly, Fed reserve requirements are imposed on any loan from a U.S. bank’s foreign branch to a U.S. resident, or on any asset purchase by the branch bank from its U.S. parent. What do you think is the rationale for these regulations?