浙江财经学院课程期末考试试卷
C) Capital outflows.
D) A surplus in the official settlements balance.
Part II, True or False (10*1.5=15 score)
( T for true and F For false, you are not required to give reason for your choice)
1.If a currency is at a forward premium by as much as its interest rate is lower than the interest rate in the other country, covered interest parity holds.
2. Contractionary fiscal policy with floating exchange rates and low capital mobility leads to currency depreciation.
3. Over the long-run, a country with a relatively high inflation rate tends to have a depreciating currency.
4. The quantity theory of money says that in any country the money supply is equated to the demand for money, which is directly proportional to the money value of the gross domestic product.
5. With fixed exchange rates, external capital flow shocks have little impact on the internal
economy. 6. The Bretton Woods conference created the International Monetary Fund (IMF).
7. The official settlements balance is in deficit if the IS-LM intersection is to the right of the FE curve.
8. (Pf*e / P) is a useful indicator of a country’s international price competitiveness.
9. The assignment rule says that, with fixed exchange rates, fiscal policy should be assigned to stabilizing the balance of payments and monetary policy should be assigned to stabilizing the domestic economy.
10. The J curve shows a typical response of the current account balance to a drop in the exchange rate value of a country's currency.
Part III: Questions(6*6=36 score)
1. You are provided with the following information about a country's international transactions
during a given year:
Service exports $ 346 Service imports $354 Merchandise exports $480 Merchandise imports $348 Income flow, net $153 Unilateral transfers, net $142
Increase in the country holding of foreign assets, net $352 (excluding official reserves assets)
Increase in foreign holding of foreign assets, net $252 (excluding official reserves assets)
Statistical discrepancy, net $154
Calculate the official settlements balance and the current account balance. Is the country increasing or decreasing its net holdings of official reserve assets? Why?
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浙江财经学院课程期末考试试卷
2. The following rates exist:
Current spot exchange rate: $1.8/￡
Annualized interest rate on 90-day dollar-denominated bonds: 8% (2% for 90 days) Annualized interest rate on 90-day pound-denominated bonds: 12% (3% for 90 days) Financial investor expect the spot exchange rate to be $1.77/￡ in 90 days,
A)With the uncovered interest differential to make judgment that if he bases his decisions solely on the difference in the expected rate of return, should a U.S.-based investor make an uncovered investment in pound-denominated bonds rather than investing in dollar-denominated bonds? Why?
B) if there is substantial uncovered investment seeking higher expected returns, what pressure is placed on the current spot exchange rate?
3. What is the exchange rate overshooting, why does it occur?
4. Assume that a government has become committed to maintaining a fixed exchange rate that
officially values foreign currencies less, and the domestic currency (here the dollar) more,
than the free market equilibrium rate. The official rate is, say, $1.0 per pound sterling. This exchange controls result in considerable costs to a country whose government imposes them. Describe these costs and the role that bribery and parallel markets can play in economies with exchange controls.
Figure: Welfare Losses from Exchange Controls
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浙江财经学院课程期末考试试卷
$/￡
S￡ E
1.5 1.2
1.0 A C B D￡ ￡B 30 50 63.3 5. Use the standard IS-LM-FE framework and assume the country begins at a triple intersection under floating exchange rate. What effect will the following have on domestic interest rates, output levels, and the official settlements balance, assuming low capital mobility?(you are suggested explain with figure)
a. The central bank increases the money supply.
b. The government increases its spending.
6.Explain the effects of expanding the money supply on the economy of a country with fixed exchange rates. (Assume the country begins at a triple intersection ,you are suggested explain with figure)
Part III, Reading and analysis (9 score for paper1 and 10 score for paper 2)
1: China to further reform RMB exchange rate regime (体制)
The People's Bank of China（PBOC）, China's central bank, has decided to proceed further with the reform of the Renminbi （RMB） exchange rate regime to enhance the RMB exchange rate flexibility, a spokesperson of the central bank said on Jun 19, 2010, Saturday Beijing. The decision was made in view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the spokesperson said in a statement.
In further proceeding with the reform, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market, the spokesman said.
The spokesperson said China's external trade is becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010.
\the RMB exchange rate does not exist,\
The PBOC will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an
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浙江财经学院课程期末考试试卷
adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China, the spokesperson said.
China has moved into a managed floating exchange rate regime based on market supply and demand with reference of a basket of currencies since July 1, 2005.
The spokesperson said the reform of the RMB exchange rate regime has been making steady progress since 2005, producing the anticipated results and playing a positive role. ( On July 21, 2005, the People's Bank of China, announced that the RMB yuan, will be traded at a rate of 8.11 to the US and the yuan to US dollar pegging system is switched to a basket of foreign currencies.)
With the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the US dollar depreciated by varying margins.
\important role in mitigating(缓解) the crisis' impact, contributing significantly to Asian and global recovery, and demonstrating China's efforts in promoting global rebalancing,\
The gradual recovery of the global economy and upturn of the Chinese economy has become more solid with enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility, said the spokesperson.
Question1：Why the spokesperson said. \the basis for large-scale appreciation of the RMB exchange rate does not exist,\
Question2: Why the Chinese Central bank would like to proceed the reform of the Renminbi （RMB） exchange rate regime to enhance the RMB exchange rate flexibility. Can you explain the benefit by making the RMB more flexible?
2: Hot money flow and its explanation
The generally accepted view is that the inflow of short-term speculative money (so-called hot-money) began in 2007 in China targeting capital gains derived from rising stock and property prices and the anticipated appreciation of the RMB. “hot money” is defined as the flow of funds counted as capital and financial account other than for direct investment and errors and omissions. In other words, “hot money” is defined as “changes in reserve assets” minus “changes in current account” minus “direct investment flows”. This is the simplest way to express the movement of short-term funds, and the most conservative, as the estimates tend to be smaller.
When adjustments are made for the some policy measures, the BoP statistics indicate that “hot money” inflows into China accelerated from 22.5 billion USD in the first half of 2007, to 70.2 billion USD in the second half of 2007, and up to 139.1 billion USD in the first half of 2008. In contrast, a huge 184.8 billion USD of “hot money” flowed out in the second half of 2008 (2008, 2H)(Figure 1).
Figure 1: Hot money in China after adjustment
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浙江财经学院课程期末考试试卷
Foreign reserve Direct investment Current account Hot money
Some people says that the huge inflow of hot money is the reason for the increasing price of stock price and property price. In order to check this point, here we give two figures about the Shanghai Stock index and Property (资产) Price index of different regions including ShangHai, Shengzhen, Beijing.
Figure 2: Shanghai Stock Index
Figure 3: Property Price index.
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