s
Brighton Business School
Undergraduate Programmes
BSc (Hons) Finance and Investment
Level Five Examination
May 2015
EC271: International Financial Economics
______________________________________________________________________________
Instruction to candidates:
Time Allowed: 2 Hours
Rubric: You are required to answer THREE questions from a total of SIX
All questions are weighted equally (mark allocations within questions are shown in
brackets).
Nature of examination: unseen/closed book
Allowable material: non-programmable calculators
Supplied: Graph Paper for Question 1 (optional)
Page 1 of 3
EC271: International Financial Economics
(May 2015)
Question 1
Suppose the UK’s demand and supply for a good it imports from China is given by:
D = 200 − 40P
S = 20 + 20P
and China’s demand and supply for a good it exports to the UK is given by:
D* = 100 − 20P
S* = 40 + 40P
a)
Derive and graph the UK’s import demand schedule and find the equilibrium price and
quantity that would prevail in the UK in the absence of trade.
(20 marks)
b)
Derive and graph China’s export supply and find the equilibrium price and quantity that
would prevail in China in the absence of trade.
(20 marks)
c)
Now allow both countries to trade at zero transport costs. Find and graph the equilibrium
world price and the volume traded under conditions of free trade.
(20 marks)
d)
How would your analysis to part c) change if the UK imposed a tariff?
(20 marks)
e)
Outline the welfare effects that the imposition of a tariff will have in the UK.
(20 marks)
Question 2
“Whether fiscal or monetary policy has any macroeconomic effects in the short run depends on the
exchange rate regime’’. Evaluate this statement using appropriate diagrammatic analysis.
(100 marks)
Question 3
a)
When will it be beneficial for a country to join an ’optimal currency area’? Use the LLGG
framework to answer this question.
(50 marks)
b)
Now suppose that the joining country experiences wide swings in aggregate demand. Will it
still be beneficial for this country to be a member of the currency area?
(10 marks)
c)
Critically assess whether the EU can be described as an optimal currency area?
(40 marks)
Page 2 of 3
EC271: International Financial Economics
(May 2015)
Question 4
a)
Using a suitable monetary framework carefully explain how exchange rates are determined.
Illustrate your answer using appropriate expressions and supporting diagrams.
(70 marks)
b)
Use the same framework to explain why, following an increase in the money supply, the
exchange rate may ‘overshoot’ its long run depreciation.
(20 marks)
c)
What aspects of foreign exchange markets can ‘overshooting’ help to explain?
(10 marks)
Question 5
a)
Will a currency deprecation necessarily improve the current account in the short run?
Discuss.
(50 marks)
b)
Why might running a persistent current account deficit be incompatible with a fixed exchange
rate regime?
(50 marks)
Question 6
a)
What are the key characteristics of Euro-currency and Euro-bond markets?
(30 marks)
b)
What competitive advantages do Eurobanks have over domestic banks and why do they coexist?
(30 marks)
c)
Assess the impact that the growth in Euro-deposits has had on international debt and their
potential effect on international financial stability.
(40 marks)
Page 3 of 3
EC271: International Financial Economics
(May 2015)