国际金融 英文习题大题

CHAPTER 2 INTERNATIONAL MONETARY SYSTEM SUGGESTED ANSWERS AND SOLUTIONS TO END OF CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1 Explain Gresham s Law Answer Gresham s law refers to the phenomenon that bad abundant money drives good scarce money out of circulation This kind of phenomenon was often observed under the bimetallic standard under which both gold and silver were used as means of payments with the exchange rate between the two metals fixed 2 Explain the mechanism which restores the balance of payments equilibrium when it is disturbed under the gold standard Answer The adjustment mechanism under the gold standard is referred to as the price specie flow mechanism expounded by David Hume Under the gold standard a balance of payment disequilibrium will be corrected by a counter flow of gold Suppose that the U S imports more from the U K than it exports to the latter Under the classical gold standard gold which is the only means of international payments will flow from the U S to the U K As a result the U S U K will experience a decrease increase in money supply This means that the price level will tend to fall in the U S and rise in the U K Consequently the U S products become more competitive in the export market while U K products become less competitive This change will improve U S balance of payments and at the same time hurt the U K balance of payments eventually eliminating the initial BOP disequilibrium 3 Suppose that the pound is pegged to gold at 6 pounds per ounce whereas the franc is pegged to gold at 12 francs per ounce This of course implies that the equilibrium exchange rate should be two francs per pound If the current market exchange rate is 2 2 francs per pound how would you take advantage of this situation What would be the effect of shipping costs Answer Suppose that you need to buy 6 pounds using French francs If you buy 6 pounds directly in the foreign exchange market it will cost you 13 2 francs Alternatively you can first buy an ounce of gold for 12 francs in France and then ship it to England and sell it for 6 pounds In this case it only costs you 12 francs to buy 6 pounds It is thus beneficial to ship gold due to the overpricing of the pound Of course you can make an arbitrage profit by selling 6 pounds for 13 2 francs in the foreign exchange market The arbitrage profit will be 1 2 francs So far we assumed that shipping costs do not exist If it costs more than 1 2 francs to ship an ounce of gold there will be no arbitrage profit 4 Discuss the advantages and disadvantages of the gold standard Answer The advantages of the gold standard include I since the supply of gold is restricted countries cannot have high inflation 2 any BOP disequilibrium can be corrected automatically through cross border flows of gold On the other hand the main disadvantages of the gold standard are I the world economy can be subject to deflationary pressure due to restricted supply of gold ii the gold standard itself has no mechanism to enforce the rules of the game and as a result countries may pursue economic policies like de monetization of gold that are incompatible with the gold standard 5 What were the main objectives of the Bretton Woods system Answer The main objectives of the Bretton Woods system are to achieve exchange rate stability and promote international trade and development 6 One can say that the Bretton Woods system was programmed to an eventual demise Comment on this proposition Answer The answer to this question is related to the Triffin paradox Under the gold exchange system the reserve currency country should run BOP deficits to supply reserves to the world economy but if the deficits are large and persistent they can lead to a crisis of confidence in the reserve currency itself eventually causing the downfall of the system 7 Explain how the special drawing rights SDR is constructed Also discuss the circumstances under which the SDR was created Answer SDR was created by the IMF in 1970 as a new reserve asset partially to alleviate the pressure on the U S dollar as the key reserve currency The SDR is a basket currency comprised of five major currencies i e U S dollar German mark Japanese yen French franc and British pound Currently the dollar receives a 40 weight mark 21 yen 17 franc 11 and pound 11 The weights for different currencies tend to change over time reflecting the relative importance of each currency in international trade and finance 9 There are arguments for and against the alternative exchange rate regimes a List the advantages of the flexible exchange rate regime b Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime c Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime Answer a The advantages of the flexible exchange rate system include I automatic achievement of balance of payments equilibrium and ii maintenance of national policy autonomy b If exchange rates are fluctuating randomly that may discourage international trade and encourage market segmentation This in turn may lead to suboptimal allocation of resources c Economic agents can hedge exchange risk by means of forward contracts and other techniques They don t have to bear it if they choose not to In addition under a fixed exchange rate regime governments often restrict international trade in order to maintain the exchange rate This is a self defeating measure What s good about the fixed exchange rate if international trade need to be restricted 10 In an integrated world financial market a financial crisis in a country can be quickly transmitted to other countries causing a global crisis What kind of measures would you propose to prevent the recurrence of a Asia type crisis Answer First there should be a multinational safety net to safeguard the world financial system from the Asia type crisis Second international institutions like IMF and the World Bank should monitor problematic countries more closely and provide timely advice to those countries Countries should be required to fully disclose economic and financial information so that devaluation surprises can be prevented Third countries should depend more on domestic savings and long term foreign investments rather than short term portfolio capital There can be other suggestions 11 Discuss the criteria for a good international monetary system Answer A good international monetary system should provide I sufficient liquidity to the world economy ii smooth adjustments to BOP disequilibrium as it arises and iii safeguard against the crisis of confidence in the system 12 Once capital markets are integrated it is difficult for a country to maintain a fixed exchange rate Explain why this may be so Answer Once capital markets are integrated internationally vast amounts of money may flow in and out of a country in a short time period This will make it very difficult for the country to maintain a fixed exchange rate MINI CASE WILL THE UNITED KINGDOM JOIN THE EURO CLUB When the euro was introduced in January 1999 the United Kingdom was conspicuously absent from the list of European countries adopting the common currency Although the current Labor government led by Prime Minister Tony Blair appears to be in favor of joining the euro club it is not clear at the moment if that will actually happen The opposition Tory party is not in favor of adopting the euro and thus giving up monetary sovereignty of the country The public opinion is also divided on the issue Whether the United Kingdom will eventually join the euro club is a matter of considerable importance for the future of European Union as well as that of the United Kingdom The joining of the United Kingdom with its sophisticated finance industry will most certainly help propel the euro into a global currency status rivaling the U S dollar The United Kingdom on its part will firmly join the process of economic and political unionization of Europe abandoning its traditional balancing role Investigate the political economic and historical situations surrounding the British participation in the European economic and monetary integration and write your own assessment of the prospect of British joining the euro club In dong so assess from the British perspective among other things 1 potential benefits and costs of adopting the euro 2 economic and political constraints facing the country and 3 the potential impact of British adoption of the euro on the international financial system including the role of the U S dollar Suggested Solution to Will the United Kingdom Join the Euro Club Whether the U K will join the euro club will be a political as much as economic decision Recently the U K economy was converging with those of euro zone countries Economic conditions in terms of government budgets interest rates and inflation rate are becoming similar to those in euro zone countries On an economic ground this convergence is creating a condition that is conducive to U K s joining the euro club As recently pointed out by Wim Duisenberg the President of the European Central Bank British opposition to joining the euro club is more psycho political than justified on economic grounds Since many political leaders in France and Germany consider adoption of the euro as a step toward the European political union the U K is likely to join the euro zone if it is prepared to join the European political union as well Once the U K joins the euro zone the euro will no doubt become a global currency at the expense of the U S dollar CHAPTER 3 BALANCE OF PAYMENTS SUGGESTED ANSWERS AND SOLUTIONS TO END OF CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1 Define the balance of payments Answer The balance of payments BOP can be defined as the statistical record of a country s international transactions over a certain period of time presented in the form of double entry bookkeeping 2 Why would it be useful to examine a country s balance of payments data Answer It would be useful to examine a country s BOP for at least two reasons First BOP provides detailed information about the supply and demand of the country s currency Second BOP data can be used to evaluate the performance of the country in international economic competition For example if a country is experiencing perennial BOP deficits it may signal that the country s industries lack competitiveness 3 The United States has experienced continuous current account deficits since the early 1980s What do you think are the main causes for the deficits What would be the consequences of continuous U S current account deficits Answer The current account deficits of U S may have reflected a few reasons such as I a historically high real interest rate in the U S which is due to ballooning federal budget deficits that kept the dollar strong and ii weak competitiveness of the U S industries 4 In contrast to the U S Japan has realized continuous current account surpluses What could be the main causes for these surpluses Is it desirable to have continuous current account surpluses Answer Japan s continuous current account surpluses may have reflected a weak yen and high competitiveness of Japanese industries Massive capital exports by Japan prevented yen from appreciating more than it did At the same time foreigners exports to Japan were hampered by closed nature of Japanese markets Continuous current account surpluses disrupt free trade by promoting protectionist sentiment in the deficit country It is not desirable especially when it is brought about by the mercantilist policies 5 Comment on the following statement Since the U S imports more than it exports it is necessary for the U S to import capital from foreign countries to finance its current account deficits Answer The statement presupposes that the U S current account deficit causes its capital account surplus In reality the causality may be running in the opposite direction U S capital account surplus may cause the country s current account deficit Suppose foreigners find the U S a great place to invest and send their capital to the U S resulting in U S capital account surplus This capital inflow will strengthen the dollar hurting the U S export and encouraging imports from foreign countries causing current account deficits 6 Explain how a country can run an overall balance of payments deficit or surplus Answer A country can run an overall BOP deficit or surplus by engaging in the official reserve transactions For example an overall BOP deficit can be supported by drawing down the central bank s reserve holdings Likewise an overall BOP surplus can be absorbed by adding to the central bank s reserve holdings 7 Explain official reserve assets and its major components Answer Official reserve assets are those financial assets that can be used as international means of payments Currently official reserve assets comprise I gold ii foreign exchanges iii special drawing rights SDRs and iv reserve positions with the IMF Foreign exchanges are by far the most important official reserves 8 Explain how to compute the overall balance and discuss its significance Answer The overall BOP is determined by computing the cumulative balance of payments including the current account capital account and the statistical discrepancies The overall BOP is significant because it indicates a country s international payment gap that must be financed by the government s official reserve transactions 9 Since the early 1980s foreign portfolio investors have purchased a significant portion of U S treasury bond issues Discuss the short term and long term effects of foreigners portfolio investment on the U S balance of payments Answer As foreigners purchase U S Treasury bonds U S BOP will improve in the short run But in the long run U S BOP may deteriorate because the U S should pay interests and principals to foreigners If foreign funds are used productively and contributes to the competitiveness of U S industries however U S BOP may improve in the long run 10 Describe the balance of payments identity and discuss its implications under the fixed and flexible exchange rate regimes Answer The balance of payments identity holds that the combined balance on the current and capital accounts should be equal in size but opposite in sign to the change in the official reserves BCA BKA BRA Under the pure flexible exchange rate regime central banks do not engage in official reserve transactions Thus the overall balance must balance i e BCA BKA Under the fixed exchange rate regime however a country can have an overall BOP surplus or deficit as the central bank will accommodate it via official reserve transactions 11 Exhibit 3 3 indicates that in 1991 the U S had a current account deficit and at the same time a capital account deficit Explain how this can happen Answer In 1991 the U S experienced an overall BOP deficit which must have been accommodated by the Federal Reserve s official reserve action i e drawing down its reserve holdings 12 Explain how each of the following transactions will be classified and recorded in the debit and credit of the U S balance of payments 1 A Japanese insurance company purchases U S Treasury bonds and pays out of its bank account kept in New York City 2 A U S citizen consumes a meal at a restaurant in Paris and pays with her American Express card 3 A Indian immigrant living in Los Angeles sends a check drawn on his L A bank account as a gift to his parents living in Bombay 4 A U S computer programmer is hired by a British company for consulting and gets paid from the U S bank account maintained by the British company Answer Transactions Credit Debit Japanese purchase of U S T bonds Japanese payment using NYC account U S citizen having a meal in Paris Paying the meal with American Express Gift to parents in Bombay Receipts of the check by parents goodwill Export of programming service British payment out its account in U S 13 Construct the balance of payment table for Japan for the year of 1998 which is comparable in format to Exhibit 3 1 and interpret the numerical data You may consult International Financial Statistics published by IMF or research for useful websites for the data yourself Answer A summary of the Japanese Balance of Payments for 1998 in billion CreditsDebits Current Account 1 Exports646 03 1 1 Merchandise374 04 1 2 Services62 41 1 3 Factor income209 58 2 Imports 516 50 2 1 Merchandise 251 66 2 2 Services 111 83 3 3 Factor income 153 01 3 Unilateral transfer5 53 14 37 Balance on current account120 69 1 2 3 Capital Account 4 Direct investment3 27 24 62 5 Portfolio investment73 70 113 73 5 1 Equity securities16 11 14 00 5 2 Debt securities57 59 99 73 6 Other investment39 51 109 35 Balance on financial account 131 22 4 5 6 7 Statistical discrepancies4 36 Overall balance 6 17 Official Reserve Account6 17 Source IMF International Financial Statistics Yearbook 1999 Note Capital account in the above table corresponds the Financial account in IMF s balance of payment statistics IMF s Capital account is included in Other investment in the above table MINI CASE MEXICO S BALANCE OF PAYMENTS PROBLEM Recently Mexico experienced large scale trade deficits depletion of foreign reserve holdings and a major currency devaluation in December 1994 followed by the decision to freely float the peso These events also brought about a severe recession and higher unemployment in Mexico Since the devaluation however the trade balance has improved Investigate the Mexican experiences in detail and write a report on the subject In the report you may a document the trend in Mexico s key economic indicators such as the balance of payments the exchange rate and foreign reserve holdings during the period 1994 1 through 1995 12 b investigate the causes of Mexico s balance of payments difficulties prior to the peso devaluation c discuss what policy actions might have prevented or mitigated the balance of payments problem and the