ECS3703 Assignment 2 (COMPLETE ANSWERS) Semester 2 2025 - DUE September 2025

ECS3703 Assignment 2 (COMPLETE ANSWERS) Semester 2 2025 - DUE September 2025 ...1. Suppose a nation with an open economy and fixed exchange rates is in equilibrium at its natural level of output. Explain, with the aid of a graph the effects of expansionary fiscal policy. (18) 2. Explain the difference between dollarization and an optimum currency area. (10) 3. “The combination of fiscal policy to achieve internal balance and monetary policy to achieve external balance with a fixed exchange rate faces several criticisms”. Evaluate this statement briefly. (10) 4. Discuss the portfolio balance approach to the balance of payments, and how it differs from the monetary approach (12) With the aid of a diagram, illustrate and briefly explain the process of correcting a deficit in a nation’s balance of payments by depreciation or devaluation……….[20] 2. Assuming that South Africa trades with China, use a fully labelled diagram to explain what would happen to China's foreign exchange market if the Chinese government decides to increase the tariffs imposed on South African exports to China. With the aid of a diagram, explain the tendency of a nation’s trade balance to first deteriorate before improving because of a devaluation or depreciation in the nation’s currency………….…………………………………………………………..[10] 3. With the aid of graphs, explain the difference between a stable and an unstable foreign exchange market…………………………………………………………….[10] 4. Assuming you are a Chief Financial Officer in a large manufacturing company operating in South Africa. The company realises that billions of rands in profit get eroded when selling products to foreign countries due to transaction risks. Explain the risk avoidance method and the tools that you would consider as part of your risk management strategy. Briefly explain dollarization and its costs and benefits…………………………….[10] Assume that South Africa is involved in trade with the United States of America (USA). With the aid of a diagram explain what would happen to South Africa’s foreign exchange market equilibrium (demand for SA’s currency), if the following occurs: (a) There is an increase in U.S. preference for South African-produced products. (15) (b) There is a decline in U.S. preference for South African-produced products (you can add the new AD curve on the same graph used in (a) and refer to it). (10) Assume Nation A operates under a fixed exchange rate system and is in a recession. (a) Explain, with the aid of a diagram how Nation A can use expansionary fiscal policy under fixed exchange to eliminate the recession. (25) (b) (a) Explain the advantages and disadvantages of an optimum currency area. (5) (b) Explain the conditions under which an optimum currency area would be beneficial to member countries. Explain how Nation A can eliminate the recession without any expansionary fiscal policy and explain why this is not a preferred option. (10) Some parts of South Africa have been plagued by severe floods, negatively affecting both the social and economic aspects of the country’s economy. Assuming an open economy with flexible prices, explain, using a fully labelled diagram, the effect that these floods would have on the aggregate long-run and short-run supply of goods and services. Explain how the South African government can use macroeconomic policies to mitigate the impact of the disaster. 1. Suppose a nation with an open economy and fixed exchange rates is in equilibrium at its natural level of output. Explain, with the aid of a graph the effects of expansionary fiscal policy. (18) 2. Explain the difference between dollarization and an optimum currency area. (10) 3. “The combination of fiscal policy to achieve internal balance and monetary policy to achieve external balance with a fixed exchange rate faces several criticisms”. Evaluate this statement briefly. (10) 4. Discuss the portfolio balance approach to the balance of payments, and how it differs from the monetary approach (12) Assuming that South Africa trades with China, use a fully labelled diagram to explain what would happen to China's foreign exchange market if the Chinese government decides to increase the tariffs imposed on South African exports to China. Suppose a nation with an open economy and fixed exchange rates is in equilibrium at its natural level of output. Explain, with the aid of a graph the effects of expansionary fiscal policy. (18) 2. Explain the difference between dollarization and an optimum currency area. (10) 3. “The combination of fiscal policy to achieve internal balance and monetary policy to achieve external balance with a fixed exchange rate faces several criticisms”. Evaluate this statement briefly. (10) 4. Discuss the portfolio balance approach to the balance of payments, and how it differs from the monetary approach (12) With the aid of a diagram, illustrate and briefly explain the process of correcting a deficit in a nation’s balance of payments by depreciation or devaluation……….[20] 2. Assuming that South Africa trades with China, use a fully labelled diagram to explain what would happen to China's foreign exchange market if the Chinese government decides to increase the tariffs imposed on South African exports to China. With the aid of a diagram, explain the tendency of a nation’s trade balance to first deteriorate before improving because of a devaluation or depreciation in the nation’s currency………….…………………………………………………………..[10] 3. With the aid of graphs, explain the difference between a stable and an unstable foreign exchange market…………………………………………………………….[10] 4. Assuming you are a Chief Financial Officer in a large manufacturing company operating in South Africa. The company realises that billions of rands in profit get eroded when selling products to foreign countries due to transaction risks. Explain the risk avoidance method and the tools that you would consider as part of your risk management strategy. Briefly explain dollarization and its costs and benefits…………………………….[10] Assume that South Africa is involved in trade with the United States of America (USA). With the aid of a diagram explain what would happen to South Africa’s foreign exchange market equilibrium (demand for SA’s currency), if the following occurs: (a) There is an increase in U.S. preference for South African-produced products. (15) (b) There is a decline in U.S. preference for South African-produced products (you can add the new AD curve on the same graph used in (a) and refer to it). (10) As