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ECONOMICS-2015: Daily Answer Writing Challenge – 13

ECONOMICS-2015: Daily Answer Writing Challenge – 13


1) Suppose the goods, financial, current account and foreign exchange markets are initially in equilibrium. The economy has low or imperfect capital mobility and operates at a fixed exchange rate. The economy is subject to a favourable demand shock that raises expenditure. What is the outcome of the shock on the aggregate income and interest rate in the short-run? How is the balance of payments equilibrium achieved? Draw a diagram in support of your answer. (2013 – 25 marks)


2) What is a speculative attack on a currency? Suppose the economy has a fixed exchange rate and the government is following an expansionary macroeconomic policy: The government increases the budget deficit which it finances through a monetary expansion. How does this lead to a crisis? What is the timing of the speculative attack? (2013 – 25 marks)


3) Can Kuznets’ hypothesis of inverted-U shaped curve be extended to environmental degradation? Explain (2014 – 10 marks)


4) Expand on the following three explanations for the Kuznets hypothesis about inequality and development – i) cohort size hypothesis ii) effect of openness on inequality iii) strong versus weak version of the hypothesis. (2013 – 10 marks)