Discussion:
PART A
1. In a two-country global economy with "perfect" capital mobility (pcm), explain:
a) the effects of a fiscal expansion in a "small" country when the exchange rate is free to "float", as opposed to
(b) where the small country is committed to maintaining a "pegged" exchange rate. What would be the effect in the latter case if it were a monetary expansion in the small country?
2. In a two-country global economy with "perfect" capital mobility (pcm), explain:
a) the effects on a "small" country when a "large" country undertakes a fiscal expansion if the exchange rate is "pegged", as opposed to
(b) a situation where the "large" country undertakes a monetary expansion under a "floating" rate regime. Discuss the relevance of these scenarios to Canada in the 1980s.
PART B
3. Discuss and explain the rationale underlying, and the institutional structure - in particular the functioning of the IMF - resulting from, the Bretton Woods agreement. Explain and evaluate how this institution evolved after the collapse of Bretton Woods.
4. Discuss and explain the trials and tribulations of the US dollar in the foreign exchange markets,beginning with a dollar shortage, a dollar "glut", and ultimately the causes and results of the break-up of the Bretton Woods arrangement.
5. Given the existence of a floating-rate system, discuss the effects of the Reagan tax cuts -together with spending increases - on developing countries' debt positions, particularly those Latin American countries that relied heavily on recycled OPEC surpluses. How was a major default avoided, and how did attempts to reverse the US BoP deficits result in Japan's "lost decade(s)"?