ECON3580

Please provide long detailed answers with reference to the following textbook: Steven Husted and Michael Melvin, International Economics, Ninth Edition, Pearson.

PART I: TOTAL 20 MARKS. State whether the following questions are TRUE, FALSE OR UNCERTAIN. You do not have to justify your answer.

1. When a small open economy moves away from a flexible exchange rate, the monetary authorities lose any ability to influence real output by using monetary policy.

2. The foreign exchange risk premium is higher under fixed than under flexible exchange rates.

3 Under flexible exchange rates there are no official reserve transactions and the balance of payments always equal zero.

4 The absence of a forward market in a particular currency can be viewed as evidence that the market for the currency in question is too thin (that the currency is thinly traded).

5 Under a fiat standard (paper money), inflation and output growth are higher than they are under a commodity standard (either gold or silver).

6. The Canadian dollar is a world reserve currency.

7. Reducing foreign exchange risk premium shocks dampen fluctuations in the exchange rate.

8. A central bank can hike interest rates to halt the slide of its currency.

9. Floating exchange rates came about simply because central bankers of the leading industrial nations found themselves unable to sustain a system of fixed rates.

10. The fact that the key-currency country, the United States, did not respond to the balance of payments deficits by contracting the money supply is a main characteristic that distinguishes the Bretton Woods system from the classical gold standard. WRITTEN QUESTIONS (30 marks): Answer the following questions in the space provided.

Q1. (6 marks) State whether the following statement is TRUE, FALSE OR UNCERTAIN. Justify your answer. The forward rate is an unbiased predictor of the future spot exchange rate. Q2. (6 marks) State whether the following statement is TRUE, FALSE OR UNCERTAIN. Justify your answer. A small speculator buying or selling foreign exchange on a short-term basis in anticipation of exchange rate changes is more likely to use the futures market than the forward market. Q3. (6 marks) When it may be perfectly appropriate for a small country to run a trade deficit. Briefly explain. Q4. (6 marks) For most countries, there is a close correlation between balance-of-payment deficits and reserve declines. In the United States case, U.S. balance-of-payments deficits have not been matched exactly by net changes in reserve assets. Explain why this is so for the U.S. Q5. (6 marks) If a nation imposes high taxes on imported goods, will the value of its currency appreciate, or depreciate? Explain your reasoning.