Question

1. What does the term policy Trilemma mean?
Explain with the help of an international currency.
2. What is currency overshooting?
Using an example of a permanent decrease in money supply, explain with the help of graphs, how the money market and forex market respond to the change in the short run and in the long run.
3. Define:
a. Gross National Expenditure
b. Gross Domestic Product
c. Gross National Income
d. Gross National Disposable Income
e. Current Account
f. Capital Account
g. Trade Balance
Explain clearly the relationship between the above terms.
What is the significance of these definitions in understanding the phenomenon of the “Celtic Tiger”?
4. With the help of a graph, derive the IS curve and show how the goods market and the forex market interact when interest rate rises.
5. Read the attached article “ECB Gets Strength in Negative Rates” and answer the following questions:
a. “The central bank wants to boost lending by banks to businesses and consumers and boost inflation.”
How does lending by banks to businesses and consumers boost inflation?
Use graphs and/or equations to explain why the ECB expects the bond buying to increase inflation.
According to many investors, what is a better tool to achieve the same goal?
b. Explain with the help of graphs and formulae how a lower interest rate would lower the value of the Euro.
c. “A cheaper euro makes exports more competitive ….”
How does a cheaper Euro effect trade balance?
Using the goods market Keynesian Cross graph and the IS diagram, show how a cheaper Euro will affect Income and the IS curve.
d. “Exchange rates are hugely influenced by the difference in interest rates between currency areas.”
What principles can explain this phenomenon?
Use appropriate formula to explain this.

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1.
Policy makers in an open economy face a problem of achieving at most two out of three international monetary arrangements/properties that are mostly regarded as desirable: (a) Exchange rate stability, (b) Monetary policy oriented toward domestic goals, (c) Freedom of international capital movement. It is a trilemma rather than a dilemma because the available options are three: (a) and (b), (a) and (c), or (b) and (c).

An economy open to free movement of capital like the U.S. lets the nation’s citizens to diversity their holdings by investing aboard and encourages foreign investors to bring their resources and expertise into the country, but at the cost of the volatility in the value of the dollars in foreign change markets....

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