1. It is sometimes said that a central bank is a necessary element for a balance-of-payments deficit. What is the explanation for this argument?

2. What is the difference between depreciation and devaluation?

3. Explain the purchasing power parity theory of the long run behavior of the exchange rate. Indicate whether there any circumstances under which you would not expect the PPP relationship to hold?

4. Why do economists care whether or not PPP holds?

5. Your country is in recession. You feel that a policy of exchange rate depreciation will stimulate aggregate demand and bring the country out of recession:

a. What can be done to trigger this depreciation?

b. How might other countries react?

c. When would this ne begger-thy-neighbor policy?