Answered step by step
Verified Expert Solution
Question
1 Approved Answer
The following questions are all related by their focus on the Third Generation Crisis Model that features a Hot Money investment boom followed by a
The following questions are all related by their focus on the Third Generation Crisis Model that features a Hot Money investment boom followed by a panic and sudden stop. Throughout we are thinking of a country called home that seeks to maintain a fixed exchange rate versus the U.S. dollar. Initially, the country allows for the free movement of capital (no capital controls). 1. Suppose that home experiences a Real Estate Boom that leads to a surge in aggregate demand (Ibar up). Use the IS-LM model to describe the impact on the country's output, trade balance, and central bank balance sheet. Describe the potential impact of the hot money inflows on the balance sheets of the banking system if the banking system is poorly regulated and subject to the effects of moral hazard. After a long boom, suppose that the investment community becomes worried that the country is vulnerable to a sudden stop. This leads to the expectation of an imminent, uncontrolled devaluation. Use [S-LM model to describe the impact of the fear of a devaluation on the country's interest rate, its international reserves, and its output. Given your answer to question 2, explain how a sudden stop can cause both a banking crisis and a sovereign debt default. . What macro-prudential policies might a finance official undertake to make a country less vulnerable to a third generation crisis? Explain the logic
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started