Part 1 - Fiscal deficits and the current account Brazil has monetary autonomy and free capital flows. In 2020, despite a relatively large fiscal stimulus, Brazil's GDP decreased by 5.8%. Brazil's primary fiscal deficit was around 12 percent of GDP, among the largest in the world. Sooner or later, Brazil's government will have to make a significant fiscal adjustment. Most economists argue that tough fiscal restraint will be needed once the pandemic emergency ends. Suppose that the pandemic is over by the end of 2021. Consider two scenarios. In scenario A, Brazil runs a significant fiscal surplus during 2022. In scenario B, because of political hurdles, Brazil continues to run large fiscal deficits during 2022. Absent a sharp reversal of capital flows to emerging economies before 2023, what would you expect to happen to the following variables in scenario B relative to scenario A during 2022? and Why?

1. Brazil's inflation rate. 2. Brazil's current account. 3. Brazil's real exchange rate. 4. Brazil's foreign debt over GDP.

Part 2 - Capital inflows under fixed and flexible exchange rates Both Sweden and Denmark have free capital flows. Neither Sweden nor Denmark are part of the Eurozone. Sweden has a flexible exchange rate, while Denmark has a fixed exchange rate with the Euro. Assuming that this is the only relevant difference between these two countries, how do you expect the European Central Bank's recent increase in the Eurozone's monetary base affects the following variables in Denmark relative to Sweden? Explain in details 1. Real GDP. 2. Aggregate price level. 3. Foreign reserves. 4. Domestic money supply.

Part 3 - Dollarization and capital outflows Please "Write" a short essay addressing the following four questions. For the purposes of this exam, the quality of your explanation is more important than your prediction. Brevity, clarity, and precision are your friends. Panama has free capital flows and is a fully dollarized economy (i.e., it uses the US dollar as its currency, and it does not have a central bank). Panama's public debt is around 70% of GDP. The US also has free capital flows, and has a floating exchange rate. In an effort to get out of the pandemic recession, President Biden signed a large fiscal stimulus package. Assuming that this package pushes US real GDP well above potential, how do you expect the following variables to change, and why?

1. Interest rates in the US. 2. Monetary base in Panama. 3. Interest rates in Panama. 4. Panama's government debt.

Part 4 - Fiscal policy in a monetary union Please "write" a short essay addressing the four questions below. For the purposes of this exam, the quality of your explanation is more important than your prediction. Brevity, clarity, and precision are your friends. Both Spain and Germany are below their potential output. They are both in the Eurozone. Short-term nominal interest rates in the eurozone are close to 0. Germany's government debt to GDP increased from 60% to 70% during 2020. Spain's government debt to GDP increased from 95% to 120% during 2020. Some economists are making the case for fiscal surpluses in Germany in order to bring Germany's government debt down. Other economists are pushing for fiscal deficits in Germany to help Germany's economic recovery. How do you expect the following variables to change if Germany runs fiscal surpluses relative to the opposite scenario in which Germany runs fiscal deficits, and why?

1. The real exchange rate between Spain and Germany. 2. Spanish prices, unemployment, and current account. 3. Spanish government debt.

Part 5 - Global Economics

The main mandate of the European Central Bank (ECB) is to maintain price stability--- understood as maintaining the Eurozone inflation rate around 2%. This contrasts with other central banks like the FED which also have maximum employment as a main part of their mandate. In the months before the war in Ukraine, the Eurozone Consumer Price Index was increasing at a rate above 5%. The war in Ukraine has led to sharp increases in the prices of many commodities, including oil and natural gas.

1.Draw an AD-AS graph to show the economic impact of higher oil prices on Europe. How should the European Central Bank respond according to its mandate?

2.How would this ECB intervention affect the following variables in the eurozone as a whole? a) Money supply. b) Real GDP and unemployment. c) The real exchange rate. d) Debt sustainability in eurozone countries.

3.Denmark has its currency pegged to the Euro. How would this ECB intervention affect Denmark's monetary base?

4.In this context, suppose that Portugal--- a Eurozone country---decides to respond with an expansionary fiscal policy. How would this affect the following variables in Portugal? a) Prices. b) Unemployment. c) Interest rates. d) Debt sustainability.

5.The graph below plots the Gross Debt of the Italian Government (as a percentage of GDP). Suppose that you are Mario Draghi, Prime Minister of Italy, and that you "stumble upon" Christine Lagarde, the ECB chairwoman, in an elevator. You only have one minute to talk to her. Given the enormous Italian government debt, how would you like to influence her monetary policy decision, and why? "Write" down the main economic argument that you would use.