BSc.

(Econ) by course unit

Monday 27th April 2015, 14:30 - 16:30

ECN209 International Finance Duration: 2 hours

YOU ARE NOT PERMITTED TO READ THE CONTENTS OF THIS QUESTION PAPER UNTIL
INSTRUCTED TO DO SO BY AN INVIGILATOR

Answer ALL questions from BOTH sections

Calculators are permitted in this examination. Please state on your answer book the name and type
of machine used.

Complete all rough workings in the answer book and cross through any work that is not to be
assessed.

Possession of unauthorised material at any time when under examination conditions is an

assessment offence and can lead to expulsion from QMUL. Check now to ensure you do not have
any notes, mobile phones, smartwatches or unauthorised electronic devices on your person. If you
do, raise your hand and give them to an invigilator immediately. It is also an offence to have any
writing of any kind on your person, including on your body. If you are found to have hidden
unauthorised material elsewhere, including toilets and cloakrooms it will be treated as being found in
your possession. Unauthorised material found on your mobile phone or other electronic device will
be considered the same as being in possession of paper notes. A mobile phone that causes a
disruption in the exam is also an assessment offence.

EXAM PAPERS MUST NOT BE REMOVED FROM THE EXAM ROOM

Examiner: Andrea Tesei

© Queen Mary, University of London, 2015

Page 2 ECN209 (2015)

SECTION A

Answer True, False or Uncertain to the following 4 statements (questions 1-4). Briefly
explain your answers, and make use of the appropriate equations where needed. No credit
will be given without explanation.

Question 1

A real exchange rate depreciation leads to a current account surplus.

[10 marks]

Question 2

If a country has a current account deficit then the country’s net foreign wealth is increasing.

[10 marks]

Question 3

Fiscal policy is a more effective tool to influence output when the exchange rate is fixed
rather than when it is flexible.

[10 marks]

Question 4

Under the Bretton Woods System, an individual country (other than the United States) with
underemployment and excessive current account deficit could achieve both internal balance
and external balance only by implementing expansionary fiscal policy. [Diagrams required]

[10 marks]
ECN209 (2015) Page 3

SECTION B

Answer ALL questions

Question 5

Suppose that a U.S. Dollar costs 8.65 Argentinian Peso, but the same Dollar can be
purchased for 2.78 Brazilian Real.

a) What is the Peso/Real exchange rate in equilibrium?

[3 marks]

b) Suppose that the Argentinian Peso depreciates by 10% against the Dollar and the
Brazilian Real depreciates by 5% against the Dollar. What is the new Peso/Real exchange
rate in equilibrium? Which one of the two currencies has depreciated against the other?

[3 marks]

c) Now suppose that the exchange rate between the Dollar and the Peso and the Dollar
and the Real is the same as in point a) of this question. However, suppose that a Real costs
4 Pesos. Is there an arbitrage opportunity here? If so, explain exactly what are the
transactions you would perform in order to make riskless profits by investing an initial 100
U.S. Dollar amount.

[4 marks]

Question 6

Consider the AA-DD model we have studied in class. Suppose the economy begins at its
long-run level with output at its full-employment level and the home current account at some
given level X.

Compare and explain the short-run effects on home output, the home current account, and
the nominal exchange rate of the following two temporary policies by the home government.
Use the AA-DD-XX diagram to support your answers.

a) An increase in home money supply under flexible exchange rates and under fixed
exchange rates

[10 marks]

b) A decrease in the home government taxes under flexible exchange rates and under
fixed exchange rates
[15 marks]

Turn Over
Page 4 ECN209 (2015)

Question 7

Consider the asset approach to exchange rate determination for the U.S., assuming that
prices are sticky in the short-run. Suppose there is a permanent increase in the U.S.
aggregate money demand.

a) Explain and illustrate graphically the short-run response of the Dollar interest rate
and the Dollar/Euro exchange rate.
[15 marks]

b) Assume that prices are flexible in the long-run. Explain and illustrate graphically the
long-run response of the Dollar interest rate, the price level and the Dollar/Euro
exchange rate.
[10 marks]

End of Paper