1. The following excerpt is from the case study “The Euro in crisis: Decision Time at the European Central Bank”. (distributed in the class)
“……a bailout for Greece would send a signal to other indebted member states that the ECB would step in if private lenders become nervous.”
Answer the following questions with appropriate diagram and using AD-AS model, Money market, aggregate expenditure model, and forex market (as required). For part a, b and c appropriate diagrams are MUST. Else points will be deducted.
a. When ECB went out for bail out then what was expected to happen to the interest rate in Greece? (10 points)
b. Comment on the expected outcome of this policy on behalf of ECB. Provide diagram and detailed explanation on output and prices. (10 points)
c. If government of Greece also increases (assume) the expenditure (expansionary fiscal policy) then what do you think can potentially happen to prices?Provide the relevant diagram and explain your answer.(10 points)
d. Overall do you think that bail out of Greece is healthy policy from the perspective of ECB? Answer this one in context of the Case study. ( 5 points)
e. Explain why a group of economist thinks that a common currency like Euro for the region is not a good idea. Restrict your answer to the concepts discussed in the class and the case study. Page limit is one page. (5 points
Note: This is a group assessment. In any group maximum of 3 members are allowed. In mentioned cases provide a neat diagram to explain your answer. Make sure to label axes properly. Else points will be deducted. The maximum possible points is 40.
1.The following information is from International Business Times (April 4, 2012)
“China has reacted to U.S. QE in the past by expressing dismay, primarily given the overweight U.S. dollar position in their foreign currency reserves.”
(Source: http://www.ibtimes.com/exnet/chinese-reaction-fed-qe3-not-happy-797141 )
Explain the dismay of Chinese government due to quantitative easing (QE) using the FOREX market model discussed in the class. Make sure that you consider the undervalued exchange rate of China while answering the question. Provide neat diagram (s) to explain your answer. (20 points)
2.Let’s assume the following information for an economy.
[All the notations are standard as discussed in the class]
a.Find the size of the multiplier in this economy. (3 points)
b.Find the short run equilibrium output. (7 points)
3.The following news was issued in Bloomberg.
“Thailand’s baht fell for a second week to reach the lowest level since 2010 and the benchmark stock index led losses in Southeast Asia on concern worsening political unrest will spur further capital outflows”.
a.Why do you think that there is going to be capital outflow? (3 points)
b.If indeed there is going to be huge capital flight, what should be the policy taken up by Bank of Thailand to avoid a free fall of their exchange rate and how they can achieve it (explain at least one instrument)? (5+2=7 points)