HE206

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NANYANG TECHNOLOGICAL UNIVERSITY


SEMESTER 2 EXAMINATION 2006-2007


HE206 - International Monetary Economics


April/May 2007 Time Allowed: 2 hours


INSTRUCTIONS

1 This paper contains TWO(2) questions and comprises TWO(2) pages.

2 Answer all TWO(2) questions.

3 The number of marks allocated is shown at the end of each question.

4 Begin your answer to each question on a separate page of the answer book.

5 Answers will be graded for content and appropriate presentation.
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Question 1

Illustrate with a diagram and explain your answers to each of the following questions.

(a) With consecutive high GDP growth rates, the Chinese RMB was under tremendous
pressure to appreciate against the US dollar. However, the Chinese government had
fixed her exchange rate at RMB8.27 per US dollar. What can the Peoples Bank of
China do with US dollars and her money supply in order to hold the exchange rate
fixed at RMB8.27 per US dollar?
(15 marks)

(b) Suppose that the Peoples Bank of China eventually revalued her currency to
RMB7.75 per US dollar. What would be the impacts of revaluation on Chinas output,
official reserves and money supply?
(15 marks)

(c) In order to peg her exchange rate against US dollar, why should Hong Kong have to
forgo monetary independence to maintain her free movement of capital?
(10 marks)

(TOTAL: 40 marks)
HE206

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Question 2

Suppose that the United States has adopted an expansionary policy. Illustrate with a diagram
and explain your answers to each of the following questions.

(a) What would happen to its private saving, investment and trade balance according to
the national saving identity?
(10 marks)

(b) What would happen to its exchange rate, output and current account according to the
DD-AA model?
(10 marks)

(c) If the expansionary monetary policy is a permanent one, given that the Euro is
freely traded in financial markets, what would be the short-run effects on the
dollar/Euro exchange rate and interest rate in the US?

(10 marks)

(d) In the long run, what would be the dollar/Euro exchange rate and price level in USA?

(10 marks)

(e) Suppose that the US is in full employment. What would be the short-run and long-
run effects of a permanent increase in money supply on US output?
(10 marks)

(f) If the expansionary monetary policy has resulted in inflation in the United States.
What would happen to Chinese inflation and exchange rate if China were to maintain
her internal and external balance?
(10 marks)

(TOTAL: 60 marks)




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