International Macroeconomics

13th January 2012

Academic year 2011-2012

Universit de Lige

Exam

Question 1 (2 points):
Explain precisely what the balance of payments is.
Question 2 (1 point):
What is the fundamental balance of payments identity?
Question 3 (2 points):
What is the Trilemma in International Macroeconomics ? Explain carefully.
Question 4 (2 points):
What is the asset approach of exchange rates? Explain. Why is this theory insufficient to
explain the determination of exchange rates?
Question 5 (2 points):
Explain how the following transactions generate two entries a credit and a debit in the
Belgian and the US balance of payments and describe how each entry would be classified:
A Belgian firm imports electronic products worth $15 000 from a US firm. The Belgian firm
must pay in dollars and buys $15 000 (i.e. 10 000 euros at 1 = $1.5) from the Belgian
Central Bank. The Belgian firm pays the US dealer with a $15 000 check from its Belgian
bank account.
Question 6 (2 points):
In the foreign exchange market, we often observe large swings in the rates of foreign
currencies. This phenomenon is called exchange rate overshooting. By using diagrams,
explain the mechanism of exchange rate overshooting of the euro-dollar after a permanent rise
in money supply in the euro zone.

Question 7 (3 points):
Figure 1 shows the GDP growth rate and the current account balance (as a percentage of
GDP) of Turkey since 2004.

Figure 1: The Turkish Current Account (2004-2011)

Source: The Economist
a) Comment the size and the evolution of the Turkish current account balance between
2004 and 2011.
b) Is there any link between the current account and GDP growth ? Explain carefully.
c) How can you explain the size of the current account deficit in 2009 ?
d) Can the financial balance be responsible for the large current account deficits ? How ?
Explain carefully.
e) Are these large current account deficits a cause for concern for the Turkish
government and why ?
f) Should the Turkish government intervene ? If yes, how ? Explain carefully.
Question 8 (3 points):
China has pegged its currency (the Renminbi) to the US dollar. What does it mean ? How can
you explain this exchange rate policy choice ?
Question 9 (3 points):
Can you explain the evolution of the euro-dollar exchange rate between July 2011 and
January 2012 as depicted in Figure 2? Is this evolution a good thing for the European
countries and the Eurozone ? Use all the knowledge you have acquired in this course to
answer these question carefully.
2

Figure 2 Euro-dollar exchange rate July 2011 January 2012

Source : European Central Bank