Final Exam Questions -- Economics 4131, Spring 2006
1. Explain how the gold standard operated in the classical period (1870-1914). What were
the advantages and disadvantages? Some say the gold standard sacrificed internal balance
to external balance. How? What were the “rules of the game” and what would happen
when they were violated? What would happen when the demand for monetary gold rose
faster than the supply, and why was this a problem?
2. Explain the functioning of the Bretton Woods currency arrangement. Why was it
designed as it was? What strains appeared over time, and what factors led to its collapse?
What was “Triffin’s dilemma”?
3. Use the national income accounting identity to explain the phenomenon of “twin
deficits.” Explain how the surge in the U.S. fiscal deficit has spilled into a need for
international finance. What are the current sources of this finance? Describe the dilemma
facing the Asian central banks. Describe the “hard landing” scenario. What needs to be
done to ensure a “soft landing”?
4. Explain step-by-step why and how a central bank might wind up accumulating foreign
currency assets on its balance sheet, and what the consequences will be for a) the stock of
high powered money; and b) the money supply. What is “sterilization,” and how might it
be employed (and why)?
5. “When capital is mobile, a country may choose to peg its exchange rate, or it may
choose to peg its money supply, but it cannot do both simultaneously.” Explain.
6. Explain the full derivation of the AA-DD model from Krugrman and Obstfeld, Chapter
16. Explain how and why the economy returns to equilibrium from any point away from
the intersection of the two curves. Explain what it means to be above or below AA or
7. Use the AA-DD model to illustrate how the economy adjusts to an increase in
government spending when a) exchange rates are flexible; b) exchange rates are fixed.
8. Use the AA-DD model to illustrate how the economy adjusts to an increase in the
domestic money supply (expansionary...