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“ECON303

International Money and Finance
Instructions:Pleaseanswerallquestions.Notethattheanswershavetobetyped.All questionsrelatedtotheAADDanalysisshouldcontainneatlypresentedgraphs.The
assignmenthastobesubmittedtoturnitin.Notethatapartfromcorrectanswerstheclarityof
expositionthedepthofargumentsandtheoverallpresentationwillbeassessed.

Question1(15marks)

Using46papersfromGoogleScholarasreferencesdiscusstheempiricalevidenceonuncovered
interestparity.(around800wordsisexpected)

Question2(10marks)

Explainwhatismeantbytheexchangeratepassthrough.IntheAADDframeworkassumethatthe
exchangeratepassthroughincreasesfrom50%to80%.ExplainhowthischangewouldaffecttheAA
andDDschedulesdrawthem.Willtheeffectivenessoftemporarymonetaryandfiscalpolicies(i.e.their
abilitytoincreaseoutputtemporarily)beaffectedbythischange?

Question3(10marks)

UsingtheAADDframeworkandassumingtheflexibleexchangerateregimeanalysehowapermanent
changeintastesofforeignconsumersmakingthemtoprefergoodsproducedintheirowncountryover
importedgoodswouldaffectdomesticeconomyintheshortrunandinthelongrun.Discusswhat
wouldhappentooutputthenominalandrealexchangeratesandthecurrentaccount.Assumethatthe
economystartsinthelongrunequilibriumwithfullemployment.

Question4(15marks)

UsingtheAADDframeworkanalysetheeffectsofapermanentincreaseinforeignmoneysupplyon thenominalandrealexchangeratesdomesticoutputandcurrentaccountundertheflexibleexchange rates.Assumethattheeconomystartsinthelongrunequilibriumwithfullemployment.Ifthedomesticcentralbankdecidestousemonetarypolicyasaresponsetothischangeinforeignmonetarypolicywhatshoulditdo?Willitbeeffective?Howwouldthischangeyourshortrunandlong
runanalysisinparta?

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