International Monetary Theory & Policy

1. Provide concise explanations of the following concepts.

a. Outside lag

b. Seigniorage

2. True or False. (Explain your answers.)

a. Consider a fixed exchange rate system with N countries. Suppose the “center” country (the Nth country) enjoys an increase in income and so increases its imports from a non-center country. True or False: The non-center country will also enjoy an increase in income and its trade balance will improve.

b. Pegging the exchange rate is the only way to stop inflation.

3. Fixed versus Flexible Rates

From 1913 until 1939 world trade collapsed, falling from about 20 percent of world GDP to only 10 percent over that period. Many economic historians think this was driven by exogenous increases in transactions costs and increases in tariffs and quotas. Depict the effects of this change in the symmetry/integration diagram: Use the letter A to depict the location of a country that had fixed rates in 1913; use the letter B to depict where it would have been in 1939. Explain how this changes might have affected adherence to the gold standard.

4. Prediction Problem II (This is adapted from question 2 of Chapter 8 in the textbook.)

Consider a non-center country in a fixed exchange rate system. Suppose that the center country implements a contractionary monetary policy.

a. What will happen to the non-center country’s income, interest rates, and trade balance?

b. If the non-center country wanted to regain its initial income, what kind of macroeconomic policy should it employ? Depict the effects of this policy on income, interest rates, and trade balance.