Topic: Global Macroeconomics
PART A: Answer ONE question. Maximum word limit: 1000 words
1. Assume that an open economy is experiencing a stock market boom such that the level of output exceeds its full employment level. Using appropriate diagrams, examine the effectiveness of a contractionary monetary policy as a stabilisation policy tool under fixed and floating exchange rate regimes. Discuss any two problems that might affect the policy design and implementation of monetary policy.
2. Using the Central Bank balance sheet diagrams, evaluate how each of the following shocks affects a country’s ability to defend a fixed exchange rate.
a. An economic recession leads to a reduction in money demand.
b. Currency traders expect an appreciation in the home currency in the future.
Discuss possible ways to prevent exchange rate crisis.
3. Since 1983, the Hong Kong dollar has been pegged to the United States. Using the IS-LM-FX, explain how the following scenarios would affect the Hong Kong economy.
a. The US increases its money supply.
b. Hong Kong cuts government expenditure.
What would be the effect of scenario (a) and (b) on Hong Kong economy if it decides to float its currency?