, UNIVERSITY EXAMINATIONS
May/June 2024
ECS3703
INTERNATIONAL FINANCE
100 Marks
Duration: 3 Hours
First Examiner: Dr MJ Khumalo
Second Examiner: Dr KO Amusa
External Examiner: Dr L Barnard
,QUESTION 1 [20 marks]
a) Explain fully the components of the balance of payments and why these components
always balance. [10]
b) The exchange rate market can either be stable of unstable. Explain fully with an aid of
diagram(s) the distinction between these scenarios. [10]
QUESTION 2 [20 marks]
Country A is a small nation that operates under the principle of free movement of capital and a
flexible exchange rate regime. The country desires to reach the full-employment level of national
income with equilibrium in its balance of payments.
(a) Which macroeconomic policy would you recommend and why?
[5]
(b) With the aid of a diagram, explain how country A should use the policy mentioned in (a) to
achieve the full-employment level of national income with equilibrium in its balance of
payments.
[15]
QUESTION 3 [25 marks]
Suppose a country's trade balance is in a deficit position and it experiences internal inflation.
Demonstrate, with the aid of a diagram, the policy options needed for authorities to achieve both
external and internal equilibrium.
[25]
QUESTION 4 [20 marks]
(a) Explain why monetary policy would be ineffective under fixed exchange rate regime and
perfectly elastic international capital flows. [14]
, (b) Discuss the differences (if any) between an optimum currency area and a fixed exchange
rate system. [6]
QUESTION 5 [15 marks]
During a recessionary period, a nation can utilize expansionary fiscal policy and/ monetary policy.
Explain why the usefulness of these policies will depend on how flexible the domestic prices are
downward. [10]
(a) Explain why an unexpected rise in prices in the face of sticky wages can explain an
upwardsloping short run aggregate supply curve. [5]
May/June 2024
ECS3703
INTERNATIONAL FINANCE
100 Marks
Duration: 3 Hours
First Examiner: Dr MJ Khumalo
Second Examiner: Dr KO Amusa
External Examiner: Dr L Barnard
,QUESTION 1 [20 marks]
a) Explain fully the components of the balance of payments and why these components
always balance. [10]
b) The exchange rate market can either be stable of unstable. Explain fully with an aid of
diagram(s) the distinction between these scenarios. [10]
QUESTION 2 [20 marks]
Country A is a small nation that operates under the principle of free movement of capital and a
flexible exchange rate regime. The country desires to reach the full-employment level of national
income with equilibrium in its balance of payments.
(a) Which macroeconomic policy would you recommend and why?
[5]
(b) With the aid of a diagram, explain how country A should use the policy mentioned in (a) to
achieve the full-employment level of national income with equilibrium in its balance of
payments.
[15]
QUESTION 3 [25 marks]
Suppose a country's trade balance is in a deficit position and it experiences internal inflation.
Demonstrate, with the aid of a diagram, the policy options needed for authorities to achieve both
external and internal equilibrium.
[25]
QUESTION 4 [20 marks]
(a) Explain why monetary policy would be ineffective under fixed exchange rate regime and
perfectly elastic international capital flows. [14]
, (b) Discuss the differences (if any) between an optimum currency area and a fixed exchange
rate system. [6]
QUESTION 5 [15 marks]
During a recessionary period, a nation can utilize expansionary fiscal policy and/ monetary policy.
Explain why the usefulness of these policies will depend on how flexible the domestic prices are
downward. [10]
(a) Explain why an unexpected rise in prices in the face of sticky wages can explain an
upwardsloping short run aggregate supply curve. [5]
