1) As a result of the US Senate elections in Georgia on January 5, 2021, Democrats now hold majority in both chambers of the US congress, which will likely lead to a significant increase in government spending in the USA. The same news also triggered depreciation of domestic currencies in major emerging markets including Turkey. How do you evaluate these two developments? Try to discuss the following points in your answer:

Economic recovery after COVID pandemic

Economic expansion and Inflation in advanced economies

Capital flows and interest rate/yield

Emerging markets and Debt Problem

2)

Balance of payment (in Billion $)	2018	2019	2020
Current Account	-21.7	6.7	-36.7
Trade Balance in Goods	-40.7	-16.7	-37.8
Financial Account	0.48	5.1	8
Portfolio investment (by non-residents in Turkey)	0.09	3.25	-5.23
Other Investment (by non-residents in Turkey)	4.7	8.9	8.1
Official Exchange Reserves	10.4	-6.3	31.8
Net Errors and Omissions	10.8	-5.5	-3.1

Answer the following questions by using the Balance of Payment Information for Turkey in the above table.

1.         What does 6.7 billion on the current account in 2019 show us?

2.         How is it possible for Turkey to run a deficit on Trade balance in goods in 2019 and still to run a surplus on the current account?

3.         What does a negative value (-5.23) in portfolio flows in 2020 tell us?

4.         How must Turkey have covered its deficit on the current account in 2020 if the surplus on the financial account was much less than its deficit on the current account?

3) Suppose that a country is running a current account deficit. You are hired as an advisor to the government in order to help them lower the deficit. What would be your response to the below argument brought up by various parties?

“We need to lower tax (T) paid by the corporations so that they can increase their investment spending (I).”

4) You are invited to give a talk at İzmir Association of Exporters on recent developments in financial markets. Most of them believe that the recent depreciation of Turkish Lira against Euro and Dollar should increase Turkish exports. What would be your response to them based on what you have learned about the real exchange rate in this class?

5) Current spot exchange rate: 10 TL/€

Expected value of exchange rate in 3 months: 10.20 TL/€

Interest rate on 3-month TL denominated bond (i_TL): 4 % (or 0.04)

Interest rate on 3-month euro denominated bond (i_€): 1 % (or 0.01)

1. Should a person make an investment in TL or in Euro-denominated bonds according to the values above?

2. What would change in your answer in part a if the risk associated with Turkey increases by 2 percent?