Short-Answer Questions (10 Points Each)

1. Using the Mundell Fleming Model with fixed exchange rates, show the impact of an increase

in taxes on GDP, the exchange rate and Net Exports? Carefully explain using an appropriate

diagram. (1 paragraph and a diagram is required)

2. Suppose there is inflation in Hong Kong. The HKMA conducts an open market operation

sale, what is the impact on the exchange rate and Net Exports, Real GDP and inflation? Is the

HKMA policy likely to be effective in controlling inflation? Carefully explain using an

appropriate diagram. (1 paragraph and a diagram is required)

3. Does the HKMA independently control Monetary Policy in Hong Kong? Explain. (1

paragraph. Not diagram required)

4. We can say that a large open economy, like the United States can be modeled using an

average of the closed economy ISLM model and a small open economy (Mundell Fleming)

model, with flexible exchange rates. Based on the conclusions we have reached from studying

these models, if the objective is to boost employment, rank in order (ie. 1, 2, 3) of most

effective to least effective the following: monetary policy, trade restrictions (trade policy) and

fiscal policy, in the US. Explain your reasoning. (1 paragraph. Not diagram required)

5. Suppose it can be argued that a large economy like China can be modeled using an average

of the closed economy ISLM model and a small open economy (Mundell Fleming) model with

fixed exchange rates. Based on the conclusions we have reached from studying these models,

if the objective is to boost employment, rank in order (ie. 1, 2, 3) of most effective to least

effective the following: monetary policy, trade restrictions (trade policy) and fiscal policy, in

China. Explain your reasoning. (1 paragraph. Not diagram required)

6. Suppose a deal is struck between a consortium of Chinese SOE’s, to provide cash,

machinery, and technology, designed to help oil extraction and processing, to the Venezuelan

Government in exchange for an equity stake in some oil fields in Venezuela. Suppose this deal

radically improves the fiscal position of the Venezuelan government. Given this information,

what would be your policy advice be to the Venezuelan authorities to end the inflationdepreciation spiral? Explain using theory and intuition (No Diagram required, 1-2 paragraphs

required)

7. Suppose after some deliberation, the US government, under President Biden decides to

unwind the Trump-era tariffs. Given the relatively high dependence on trade in China, in

comparison with the US, what is the likely impact on the Chinese RMB? Explain carefully using

a diagram of equilibrium foreign exchange. Explain the theory and intuition carefully. (Diagram

is required, 1-2 paragraphs required)

8. Referring to the FOMC policy release statement of March 16, outline carefully the data that

the Fed is reacting to in particular in its recent change in the policy rate, reflecting its “Dual

Mandate”. (No Diagram Required)

9. We continue the background story from question 6, where a consortium of Chinese SOE’s

has offered a deal for cash, investment and technology in exchange for equity in oil fields in

Venezuela. Use a bond market diagram to illustrate and explain the impact on the market for

Venezuelan Sovereign Bonds. Also show, using an appropriate foreign exchange market

diagram, the likely impact of this event on the Venezuelan Bolivar. Is there any link between

your two diagrams? (2 Diagrams required, 2-3 paragraphs required).

10. Using the model of demand and supply in the foreign exchange market, demonstrate the

effect of an increase in the foreign interest rate. Explain your diagram carefully. (1 paragragh,

Diagram is required).