Reference no: EM133990854

Questions:

1) The critical backing ratio (RC / M) when a speculative attack occurs depends positively on two factors. Name and explain these two factors and the intuition as to why the critical backing ratio is positively related to these two factors.

2) Why does the myopic approach in the 1st generation crisis model lead to a "jump" in the exchange rate while the "forward looking" approach does not? Explain your answer making reference to money market equilibrium.

3) We discussed the Peruvian crisis of 1986 - using the central bank's balance sheet and a money market diagram, explain why and how the Peruvian CB lost 75% of its international reserves in two years.

4) Suppose your country, lets call it Snow, pegs their currency to the US dollar and that the Federal Reserve embarks on a highly accommodative monetary policy driving US interest rates to historical lows. Using the central bank's balance sheet for Snow and a money market diagram along with an FX diagram, show and explain how all are affected by the Fed's accommodative monetary policy. Assume that the central bank of snow maintains the same amount of domestic credit (B). Let point A represent conditions before the Fed's expansion and point B the conditions after.