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.
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)
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?
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)
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)
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)
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.
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)
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.