Question 3 (15 points)

a. The collapse of the Mexican peso began at the end of 1994 and caused an outflow of capital from many middle-income countries. Moreover, it contributed to a sharp recession in Argentina and other countries. Describe the Mexican peso crisis in terms of the imbalances that caused it, the policies Mexico used to respond, and the lessons learned. (7.5 marks)

b. The most recent financial crisis began in the United States in the fall of 2007. What are the three preconditions turning a national, U.S. problem into a global financial crisis in 2007? You must address the role securitization played and how it affected regulators. (7.5 marks)