COURSE CODE: ECON1085

COURSE DESCRIPTION: International Monetary Economics

EXAM DATE: 22nd April -

EXAM START TIME: Released at 9am 22nd April

Submission Closes at 9pm 22nd April
EXAM DURATION:
The exam should take approximately 3 hours
to complete.
TOTAL number of pages (incl. this 8
cover sheet)

Final Assessment 

The assessment consists of 10 problems with scenario analysis.

Each problem will have multiple sections including diagrammatically and mathematical
components. You must complete all problems and each component of the problem. 
Problems are to be answered in a Word document file and uploaded via canvas as per
previous assessments. Diagrams may be handwritten and inserted into the document
by taking a picture, however to minimize the file size the final document for
submission needs saved and uploaded to canvas as a PDF

Please start each question on a new page and clearly label each question and each part of
the question  

This exam is worth 50 marks. Each question has multiple parts which total to 5 marks.

Requirements: 
This assessment must be submitted electronically via Canvas and must constitute your own
work. Submission for this assignment is via Turnitin, therefore it is automatically checked for
any form of plagiarism, resulting in zero grade for the section that is considered not to be
your own work and academic misconduct if plagiarism occurs in multiple sections. 
You are required to upload the file in .doc, docx or PDF only. If the file is uploaded in any
other format that is not recognised via Turnitin and you don’t receive a similarity score – the
assessment will not be marked and a grade of zero for the assessment will be applied. 

As this is a final assessment, only a single submission is permitted and late submissions
will not be accepted. If circumstances occur that prevent you being able to undertake the
assessment on the due date – you will have to apply for special consideration:
This webpage provides instructions about how to go about
this: http://www1.rmit.edu.au/students/specialconsideration (Links to an external site.)Links
to an external site. (Links to an external site.) The submission window will closed exactly at

ECON1085 Main Exam (SIM), Semester 1 2020 Page 1 of 8

the cut-off time. Please submit well before cut-off time to ensure that nothing impedes your
ability to upload the assessment, such as internet/wifi issues. This will not be a sufficient
excuse to grant extensions – you are responsible for ensuring that you are able to submit the
assessment on time.  

Details: 

Where mathematical calculations are required you must state the equation used as well as
each step in your calculations. Where diagrams are required, they must be fully labelled - all
axis, lines, intercepts, equilibrium positions, etc.... 

For diagrams you can either draw directly in the word document using 'shapes' and 'text
boxes' for labelling (please remember to 'group' all your diagram items as they are likely to
move on in your document - especially when you upload the word file and you will lose
marks if we cannot 'see' it properly) or you can draw the diagram free-hand on paper, take a
photo and paste into the word document. Do not copy and paste diagrams out of textbooks,
web pages, provided lecture slides....... This must represent your own work. 

Assessment Declaration 
This is an individual piece of assessment. That means it must be your own work and you
can’t copy or have someone else complete any part of the work for you. 
By submitting this assessment you are declaring that you have read, understood and agree
to the content and expectations of the Assessment declaration. 

QUESTION 1

(a) State how the following transactions would be recorded in Singapore’s’ Balance
of payments. In your answer state the item, the relevant account, and whether it is a
credit or a debit entry.

(i) A Singaporean resident purchases a dairy farm in New Zealand

(ii) A UK resident visits their relatives in Singapore and spends SGD 600 shopping on
Orchard road.
(iii) An Australian resident purchases a factory in Malaysia from a Singaporean resident
(iv) A Singaporean company pays dividends to its Australian shareholders
(v) An Australian resident receives income for services rendered in Singapore
(2.5 marks)

ECON1085 Main Exam (SIM), Semester 1 2020 Page 2 of 8

(b)
Review the table below:-
   unit Data S$m Previous period
Balance of Payments S$m 3,530.80 4,141.10
Current Account Balance S$m 19,600.60 24,194.50
Exports of Goods and Services S$m 224,918.40 220,269.20
Imports of Goods and Services S$m 191,669.00 183,147.20
Primary Income Balance S$m -11,611.60 -10,716.50
Secondary Income Balance S$m -2,037.20 -2,211.00
Reserve Assets S$m 3,530.80 4,141.10
Official Foreign Reserves US$m 282,995.20 278,625.10
Net International Investment Position S$m 1,207,120.5

Provide an economic assessment of the data presented. In your answer refer to the
economic significance of the various accounts in the balance of payments, the role of the
central bank, international net debt, changes in foreign investment and changes in trade
flows, savings and investment differentials .
(2.5 marks)

(2.5+2.5 =5 marks)
QUESTION 2

In the context of National Income Accounting and the Intertemporal model: Consider a
country “smartville” with a closed economy real rate of interest of 3% while the prevailing
world interest rate is 1.5%.

(i)Use the metzler diagram as a framework to critically evaluate the likely outcomes for
the “smartville” economy. In your answer refer to the current account balance,
savings and investment, comparative advantage, and discuss how “smartville” might
gain from opening up to trade with the rest of world in this context.
(5 marks)

ECON1085 Main Exam (SIM), Semester 1 2020 Page 3 of 8

QUESTION 3

Consider models of Exchange rate determination.

Assume interest parity holds and the return on a domestic asset is equal to the covered
return on a foreign asset. In the domestic economy the central bank decreases the interest
rate in order to stimulate the economy.

Using both covered and uncovered interest parity conditions identify the direction variables
would be expected to move in response to the policy changes in order to restore parity.
What role do expectations play if any in this process?

(5 marks)
QUESTION 4

Consider theories relating to exchange rate determination in the Long Run. The domestic
central bank responds to the COVID 19 virus by increasing money supply via quantitative
easing measures.

(a) Applying the Dornbusch’s sticky price model and assuming the exchange rate is not
managed directly by the central bank, explain the implications of the central bank actions
on the spot exchange rate (e)

(i) in the short run

(ii) in the long run
(2 marks)

(b) Applying the monetary model, explain the implications of the central bank action on the
spot exchange rate
(2 marks)

(c) What are the key differences in the monetary and Dornbusch models of exchange rate
determination?
(1 mark)

(2+2 + 1) = 5 marks

ECON1085 Main Exam (SIM), Semester 1 2020 Page 4 of 8

QUESTION 5

Consider the relationship between the exchange rate and the balance of payments. Examine
the case of a small country in the import and export markets under the elasticity approach.

(a) Draw a separate graph for the import market and the export market
illustrating the effect of a rise in e, on the foreign price of imports and exports and the
quantities of imports and exports respectively.
(1 mark)
(b) What can be determined about the effect on the trade balance from a
rise in e as a result of your analysis in part (a).
(1 mark)
(c) If there is less than 100% pass through how might this impact on
import expenditure?

(1 mark)
(d) Assume a small economy is below full employment. Illustrate and
explain how a reduction in the value of the domestic currency (rise in e) will impact on
the trade balance under the absorption approach.
(1 mark)
(e) Consider how you might model the impact of the COVID19 virus on a
small economy initially at full employment. Discuss likely outcomes using the absorption
model.
(1 mark)

(1 + 1 + 1 + 1+1 = 5 marks)

ECON1085 Main Exam (SIM), Semester 1 2020 Page 5 of 8

QUESTION 6

In the framework of the Swan model, assume that Singapore was achieving both internal
and external balance, prior to the outbreak of COVID 19. Assume that Singapore faces a
relatively inelastic IB schedule and a relatively elastic EB schedule.

(a) Illustrate a likely outcome of the COVID19 virus on both internal and external balance
and mark Singapore’s current post virus position on a Swan Diagram as X.
(1 mark)

(b) Briefly explain how and why an attempt to restore internal balance will disrupt external
balance
(1 mark)

(c) What automatic mechanisms may help restore internal balance? How effective might
these mechanisms be in the current economic situation brought on by the Covid19 virus?

(2 marks)

(d) Following the recommended policy assignment rules, what policies should be put in
place to restore general macroeconomic equilibrium.

(1 marks)

(1 + 1 + 2 + 1 = 5 marks)

ECON1085 Main Exam (SIM), Semester 1 2020 Page 6 of 8

QUESTION 7

With reference to the IS-LM-BP analysis of a small economy like Ireland, answer the
following questions and provide the required explanation and diagrams.

(a) Assuming Ireland trades predominantly within the eurozone, has perfect capital
mobility and a fixed exchange rate (Euro), examine the effect that an expansionary
monetary policy put in place by the European central bank has for the domestic
(Irish) economy.
(2 marks)

(b) To counteract the negative effects of the COVID 19 virus on the domestic economy of a
small open economy with a flexible exchange rate (such as New Zealand), would you
recommend a fiscal or monetary policy response? Use the IS LM BP model to support
your answer
(3 marks)
(2 + 3 = 5 marks)

QUESTION 8

With reference to the IS-LM-BP analysis, answer the following questions and provide the
required explanation and diagrams to support your analysis.

(a) Assume a country like the United Kingdom (UK) with high levels of capital mobility
and a flexible exchange rate, puts in place an extensive expansionary monetary policy.
Examine the likely effect that this policy has for the UK economy.
(2.5 marks)

(b) How might an expansionary fiscal policy in UK spill over to a smaller trading partner (for
example the republic of Ireland)? Illustrate and explain the macroeconomic
interdependencies between the UK and Ireland. What other factors might impact the
transmission of impacts between the two nations?
(2.5 marks)

(2.5 + 2.5 = 5 marks)

ECON1085 Main Exam (SIM), Semester 1 2020 Page 7 of 8

ECON1085 Main Exam (SIM), Semester 1 2020 Page 8 of 8
QUESTION 9

Consider a country with a fixed exchange rate. Assume there is initially macroeconomic
equilibrium, there is no flow of assets/ capital internationally i.e. zero capital mobility. Then
the Government undertakes an expansionary fiscal policy. Using the IS-LM-BP framework

(a) Illustrate the initial policy effect graphically.

(1 mark)

(b) Due to the policy what is the resulting disequilibrium.

(1.5 marks)

(c) What action does the central bank need to undertake to maintain the fixed exchange
rate?

(1.5 marks)

(d) What is the net effect on Y as a result of the monetary expansion?

(1 mark)

(1 + 1.5 + 1.5 + 1 = 5 marks)

QUESTION 10

“A small open economy that relies heavily on trade with other nations is better positioned to
adjust to external shocks if it has a floating/ flexible exchange rate mechanism” Discuss.

In your answer consider automatic adjustment mechanisms.

(4 marks)

How might the current COVID 19 context impact on the adjustment process?

(1 mark)

(4+1=5 marks)

ECON1085 Main Exam (SIM), Semester 1 2020 Page 9 of 8