International Finance: Exam Questions and Answers

BA7020 International Money and Finance

Task:

Section A: Answer one question only from this section

1.Answer all parts of this question:

(a) Explain the factors that affect the equilibrium exchange rate. (10 marks)

(b) Explain what is meant by exchange rate “overshooting”. (10 marks)

(c) During 2016, the sterling pound went from £0.67 per 1 US dollar to £0.80 per US dollar. By how much did the sterling pound depreciate against the US dollar? (5 marks)

(d) What is the difference between a sterilised and an unsterilised foreign exchange market intervention by a central bank? Describe the mechanics of each type of intervention. Why intervention can be irresponsible and/or ineffective? (15 marks)

(Total 40 Marks)

2. Answer all parts of this question:

(a) Comment on the statement that a current account deficit is always a sign of weakness. (10 marks)

(b) How would the following transaction show up in the UK balance of payments accounts? A UK manufacturing firm exports machinery to a US firm, which pays the UK firm from its UK bank account. (5 marks)

(c) Explain how government budget deficits and surpluses are related to the savings and investment and the current account balances. (10 marks)

(d) Critically discuss how nations can cope with unsustainable current account deficits. (15 marks)

(Total 40 Marks)

Section B

Answer two questions from this section

3. Answer all parts of this question:

(a) Explain purchasing power parity (PPP), both the absolute and the relative versions. What causes deviations from PPP? (10 marks)

(b) Explain the monetary approach to exchange rate determination. (5 marks)

(c) Explain how fundamental and technical analysis can be used for exchange rate forecasting. Discuss their difficulties. (15 marks)

(Total 30 Marks)

4. Answer all parts of this question:

(a) What is meant by the term “impossible trinity”/ “trilemma” in international finance? (10 marks)

(b) Focusing on the European Monetary Union, what are the costs and benefits of a monetary union? (15 marks)

(c) Explain the mechanism which restores the balance of payments equilibrium when it is disturbed under the gold standard. (5 marks)

(Total 30 Marks)

5. Answer all parts of this question:

(a) What are some indicators of a country’s economic health? (10 marks)

(b) Explain what actions a multinational corporation can take to reduce its exposure to a host government takeover. (10 marks)

(c) Many antipoverty activists believe that what keeps incomes and living standards from rising as fast in the developing world as they have in the developed world is because the developed world is “greedy, ruthless, exploitative, aggressive, while [the developing world] is innocent, virtuous, abused and vulnerable”. Comment on this view. (10 marks)

(Total 30 Marks)

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