1
MEMO: ECS3703 FEBRUARY 2021 EXAM
QUESTION 1 (10)
Explain, with reference to a graph, how under a managed floating
exchange rate system of the type in operation since 1973, monetary
authorities can intervene in foreign exchange markets to moderate a
depreciation or appreciation. Refer to a graph in the prescribed book and
name the graph. You do not have to draw the graph.
Fig 14.2 1
Might limit depr to R = 1.25 1
Instead of depr to 1.50 as under free float 1
Supply excess demand of euros of WZ = €100 m 2
Out of official euro reserves 1
Part of potential US BOP deficit is covered by los of official reserve assets of
USA 2
Part reflected in depreciation of $ 1
Loss of official reserves only indicates the degree of official intervention in
foreign exchange markets and not the deficit 2
QUESTION 2 (10)
Assume a foreign exchange market where the supply curve of foreign
exchange is negatively sloped but steeper (less elastic) than the
demand curve. Explain what will happen should the exchange rate
deviate (higher and lower) from the equilibrium exchange rate. Refer to a
graph in the prescribed book and name the graph. You do not have to
draw the graph.
Fig 16.3 with eq e-rate R =$1.20/€ at E 1
At lower e-rate R = $1/€ 1
Excess demand for euro’s = €1.5b (UB) 1
Bop deficit 1
Automatically pushes e-rate upward back to R = $1.20/€ 1
At higher e-rate R = $1/€1.40 1
Excess supply of euro’s = €1.5b (NT) 1
Bop surplus 1
Automatically pushes e-rate back down to eq R = $1.20/€ 1
Stable 1
1
, 2
QUESTION 3 (20)
Discus the meaures that have been proposed and taken to avoid or minimise
financial crises in the future.
Increasing trasparency in international relations 1
Reason 1
SDDS 1
GDDS 1
Early warning systems could provide signal 1
Example 1
Foreign investors would take note 1
Strenghtening emerging market’s banking and financial systems 1
Weakness invites financial crises and severity 1
Strengthened :
Improving supervision and prudential standards 1
Make sure banks
Meet capital reqiuremens 1
Provisoin for bad loans 1
Publish relevant and timely information 1
Deal with insolvent institutions 1
Promoting greater private sector involvement 1
Rolling over and negotiating loan 1
Providing new money 1
Lenders should take some resposibility 1
SDRM 1
Example of G20 proposed policy 1
QUESTION 4 (5)
Explain “multiple exchange rates”.
Higher e-rates on luxury and non-essential imports 2
Make more expensive for domestic buyers 1
Discourage importation 1
Lower e-rates on essential imports 2
Example 2
Make cheaper for domestic buyers 1
Encourage importation 1
2
MEMO: ECS3703 FEBRUARY 2021 EXAM
QUESTION 1 (10)
Explain, with reference to a graph, how under a managed floating
exchange rate system of the type in operation since 1973, monetary
authorities can intervene in foreign exchange markets to moderate a
depreciation or appreciation. Refer to a graph in the prescribed book and
name the graph. You do not have to draw the graph.
Fig 14.2 1
Might limit depr to R = 1.25 1
Instead of depr to 1.50 as under free float 1
Supply excess demand of euros of WZ = €100 m 2
Out of official euro reserves 1
Part of potential US BOP deficit is covered by los of official reserve assets of
USA 2
Part reflected in depreciation of $ 1
Loss of official reserves only indicates the degree of official intervention in
foreign exchange markets and not the deficit 2
QUESTION 2 (10)
Assume a foreign exchange market where the supply curve of foreign
exchange is negatively sloped but steeper (less elastic) than the
demand curve. Explain what will happen should the exchange rate
deviate (higher and lower) from the equilibrium exchange rate. Refer to a
graph in the prescribed book and name the graph. You do not have to
draw the graph.
Fig 16.3 with eq e-rate R =$1.20/€ at E 1
At lower e-rate R = $1/€ 1
Excess demand for euro’s = €1.5b (UB) 1
Bop deficit 1
Automatically pushes e-rate upward back to R = $1.20/€ 1
At higher e-rate R = $1/€1.40 1
Excess supply of euro’s = €1.5b (NT) 1
Bop surplus 1
Automatically pushes e-rate back down to eq R = $1.20/€ 1
Stable 1
1
, 2
QUESTION 3 (20)
Discus the meaures that have been proposed and taken to avoid or minimise
financial crises in the future.
Increasing trasparency in international relations 1
Reason 1
SDDS 1
GDDS 1
Early warning systems could provide signal 1
Example 1
Foreign investors would take note 1
Strenghtening emerging market’s banking and financial systems 1
Weakness invites financial crises and severity 1
Strengthened :
Improving supervision and prudential standards 1
Make sure banks
Meet capital reqiuremens 1
Provisoin for bad loans 1
Publish relevant and timely information 1
Deal with insolvent institutions 1
Promoting greater private sector involvement 1
Rolling over and negotiating loan 1
Providing new money 1
Lenders should take some resposibility 1
SDRM 1
Example of G20 proposed policy 1
QUESTION 4 (5)
Explain “multiple exchange rates”.
Higher e-rates on luxury and non-essential imports 2
Make more expensive for domestic buyers 1
Discourage importation 1
Lower e-rates on essential imports 2
Example 2
Make cheaper for domestic buyers 1
Encourage importation 1
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