ECS3703
[Type the company name]
Assignment 2
Semester 1
Memo | Due
April 2025
NO
PLAGIARISM
[Year]
, Exam (elaborations)
ECS3703 Assignment 2 Semester 1 Memo |
Due April 2025
Course
International Finance (ECS3703)
Institution
University Of South Africa (Unisa)
Book
International Economics
ECS3703 Assignment 2 Semester 1 Memo | Due April 2025. All questions
fully answered.
QUESTION 1 [40 MARKS] Assume that Sub-Saharan African countries are
small countries with perfect capital mobility and a desire to maintain a
balanced current account and correct unemployment or inflation. (a) Explain
which macroeconomic policy these countries should use to achieve this
under a scenario of a flexible and fixed exchange rate systems and why.
……………………………………………………………….……….………(10)
Introduction
Sub-Saharan African countries are often considered small open economies, meaning their
economic policies and interest rates do not influence global markets. Given perfect capital
mobility, capital can move freely across borders in response to interest rate differentials. These
countries aim to maintain a balanced current account (CA = 0) while also correcting for either
unemployment (requiring expansionary policies) or inflation (requiring contractionary
policies).
The effectiveness of macroeconomic policy—monetary or fiscal—differs under flexible and
fixed exchange rate regimes. The appropriate choice of policy depends on the interaction
between capital flows, interest rates, and exchange rate movements as explained in the Mundell-
Fleming model.
Flexible Exchange Rate System
Policy Choice: Use Monetary Policy
In a flexible exchange rate regime, the exchange rate is determined by market forces and adjusts
automatically to correct imbalances in the balance of payments. This allows the central bank to
pursue independent monetary policy to target domestic goals (e.g. unemployment or inflation).
[Type the company name]
Assignment 2
Semester 1
Memo | Due
April 2025
NO
PLAGIARISM
[Year]
, Exam (elaborations)
ECS3703 Assignment 2 Semester 1 Memo |
Due April 2025
Course
International Finance (ECS3703)
Institution
University Of South Africa (Unisa)
Book
International Economics
ECS3703 Assignment 2 Semester 1 Memo | Due April 2025. All questions
fully answered.
QUESTION 1 [40 MARKS] Assume that Sub-Saharan African countries are
small countries with perfect capital mobility and a desire to maintain a
balanced current account and correct unemployment or inflation. (a) Explain
which macroeconomic policy these countries should use to achieve this
under a scenario of a flexible and fixed exchange rate systems and why.
……………………………………………………………….……….………(10)
Introduction
Sub-Saharan African countries are often considered small open economies, meaning their
economic policies and interest rates do not influence global markets. Given perfect capital
mobility, capital can move freely across borders in response to interest rate differentials. These
countries aim to maintain a balanced current account (CA = 0) while also correcting for either
unemployment (requiring expansionary policies) or inflation (requiring contractionary
policies).
The effectiveness of macroeconomic policy—monetary or fiscal—differs under flexible and
fixed exchange rate regimes. The appropriate choice of policy depends on the interaction
between capital flows, interest rates, and exchange rate movements as explained in the Mundell-
Fleming model.
Flexible Exchange Rate System
Policy Choice: Use Monetary Policy
In a flexible exchange rate regime, the exchange rate is determined by market forces and adjusts
automatically to correct imbalances in the balance of payments. This allows the central bank to
pursue independent monetary policy to target domestic goals (e.g. unemployment or inflation).
