Assignment;
1. Complete the attached BOP worksheet. Which item(s) are particularly problematic for this country? (The worksheet at last page)
2. Show the likely impact of the current BOP situation on the exchange rate in the absence of central bank transactions (you may use either the market for home currency or the market for foreign exchange but you must be clear and consistent in your answer).
3. Explain how a devaluation might under some circumstances correct a BOP deficit? Why would that be unlikely to occur given this particular balance sheet?
4. Assuming this country wishes to maintain a fixed exchange rate, show the impact of central bank transactions in the market for foreign exchange and provide a brief explanation for your graph.
5. Suppose the Central Bank runs out of foreign exchange. Show what will happen in the foreign exchange market and provide a brief explanation of your graph.
Part 2: Short Essay. 2 pages
6. A country wishes to maintain parity in nominal terms for its currency in exchange for gold bullion. However, its inflation rate is above that of the rest of the world. Will this country most likely have a current account deficit or surplus? Explain. Using the quantity theory of money and the AD-AS diagram, show and explain how this country must adjust its current account situation and the likely impact of this adjustment on the domestic price level, level of output and employment. What would be the advantage of an international lender of last resort? What might be a disadvantage?
Part 3: A little bit longer essay. 2 pages
7. explain all the following:
a. Why does the "troika" believe that Greece's problems should be resolved by requiring Greece to run a primary fiscal surplus? In your answer, be sure to explain what the "troika" is and how they are able to require this of Greece.
b. Explain how the "troika" believes these policies will lead to long run improvement in Greece's ability to pay and what the impact of these policies has been thus far.
c. Explain how a Greek default could lead to a banking crisis and how this crisis could spread to all of Europe and even the world.
d. In your capacity as a researcher for the Greek Finance Ministry, help prepare a report to be presented to the Troika as to why this program is actually unlikely to improve the situation.
e. Should Greece leave the Eurozone? Explain
Balance of Payments Statement
Current Account
Exports of goods 1000
Imports of goods 800
Balance on Goods
Exports of Services 400
Imports of Services 200
Balance on Services
Trade Balance
Investment Income Received 50
Investment Income Paid 1000
Balance
Transfers
Foreign Aid Received 100
Balance
Balance on Current Account
Capital and Financial Account
Net Capital Transfers 0
Net Purchases of Domestic Financial Assets 300
Net Purchases of Foreign Financial Assets 500
Foreign Direct Investment 50
Balance on Capital and Financial Account w/0 CB
Balance Prior to Central Bank Transactions
Central Bank Transactions
Purchases of foreign exchange
Sales of foreign exchange
Total Balance