ECON3507 Mock Exam
Note: This file includes very brief descriptions of what an answer would include, these are not full model answers.
Part A (50 marks)
Choose
two from the following four questions:
A1. (25 marks)
A) Consider the impact of the following scenarios on the exchange rate between two countries, Country X and Country Y. Explain your reasoning for each. (15 marks)
Country X announces significant technological advancements that boost its productivity.
Country Y experiences large-scale political unrest.
There’s an expectation of higher future inflation in Country X compared to Country Y.
Answer: Analyze how technological advancements in Country X could strengthen its currency by attracting investment and boosting productivity, while political unrest in Country Y might weaken its currency due to increased risk. The expectation of higher inflation in Country X could depreciate its currency value against Country Y, assuming other factors remain constant.
B) Given that both Country X and Country Y have implemented quantitative easing but Country X’s economy is showing signs of recovery while Country Y’s economy is still stagnant, discuss the potential long-term effects on their respective currencies. (10 marks)
Answer: For the quantitative easing scenario, explain that Country X’s recovering economy might see its currency appreciate due to increased investor confidence, whereas Country Y’s stagnant economy could lead to a depreciated currency value.
A2. (25 marks)
A) Assess the implications of a central bank’s decision to significantly increase its purchases of government bonds. (15 marks)
How does this action affect the money supply?
What are the potential impacts on inflation and unemployment?
Answer: Discuss the effect of a central bank’s increased purchases of government bonds on the money supply, which typically expands as a result. This action can lower interest rates, potentially stimulating economic activity but also raising inflation risks.
B) The Stability and Growth Pact within the European Union sets out fiscal rules for member states, including a government budget deficit limit of 3% of GDP. Discuss the rationale behind this requirement and its importance for the economic stability of the eurozone. (10 marks)
Answer: Explain the Stability and Growth Pact’s deficit limit as a means to ensure fiscal discipline among EU member states, crucial for the eurozone’s economic stability. A good answer will be clear how government deficits could contribute to inflation.
A3. (25 marks)
A) Discuss the implications of negative interest rate policies adopted by some central banks. How do such policies aim to stimulate economic growth, and what are the potential risks associated with them? (10 marks)
Answer: Negative interest rate policies aim to encourage lending and investment by making it costly to hold excess reserves, but risks include eroding bank profitability and the potential for asset bubbles.
B) In the aftermath of a global financial shock, central banks often engage in unconventional monetary policy measures such as quantitative easing (QE). Explain the rationale behind QE and its intended effects on financial markets and the economy. Additionally, discuss the possible long-term consequences of sustained QE programs. (15 marks)
Answer: Quantitative easing (QE) aims to lower interest rates and increase money supply, supporting asset prices and stimulating investment, but long-term consequences may include inflated asset prices and distorted financial markets.
A4. (25 marks)
A) Discuss the potential consequences of a country deciding to abandon its pegged exchange rate system in favor of a floating rate system. (10 marks)
Consider the short-term and long-term effects on inflation, interest rates, and foreign investment.
Answer: Shifting from a pegged to a floating exchange rate system can lead to initial volatility but potentially more economic flexibility in the long term. It may affect inflation and interest rates depending on the economy’s openness, and foreign investment might initially retract due to increased uncertainty.
B) Explain how a sudden increase in investor confidence in a country’s economy can lead to an appreciation of its currency. Assess the possible impacts of such currency appreciation on the country’s export competitiveness and balance of payments. (15 marks)
Answer: Increased investor confidence can strengthen a currency, potentially harming export competitiveness but improving the balance of payments if it reflects underlying economic strengths.
Part B (50 marks)
ANSWER THIS ONE QUESTION ONLY
B1. Focusing on the effects of financial market volatility and geopolitical uncertainties on the business cycle, analyze how these external pressures have led to economic fluctuations in selected countries. Investigate how central banks have responded to such challenges, specifically in terms of maintaining financial stability and supporting economic growth.
Requirements:
For a country of your choice identify instances of financial market volatility (e.g., stock market crashes, bond yield spikes) or geopolitical events (e.g., trade wars, political instability) and their immediate impacts on the economy.
Describe the policy tools and measures employed by central banks to counteract these disturbances, including unconventional monetary policies if applicable.
Assess the effectiveness of these central bank interventions in terms of restoring investor confidence, ensuring liquidity in the financial system, and promoting sustainable economic recovery. Use relevant economic data to support your analysis.
Answer: Choose a country and discuss instances of financial market volatility or geopolitical uncertainties, like a stock market crash or political unrest. Describe central bank interventions, such as rate cuts or liquidity provision, and evaluate their effectiveness in terms of restoring confidence, ensuring liquidity, and supporting economic recovery, supported by relevant economic data.
Good answers will include data and evidence, and a clear understanding of how central bank actions can affect key variables, and how this fits with the overall mission of the central bank.
