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ECS3703 - International Finance (ecs3703) EXAM PACK (QUESTION PAPERS & SOLUTIONS) FROM JUNE2018 TO JAN2021
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Exam (elaborations) ECS3703 - International Finance (ecs3703)
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Ralph: +27 68 077 9615Email:theeconomistsoe@gmail.com
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ECS3703
JAN2021 SUPP EXAM MEMO
2021
UNISA JAN/FEB SUPLEMENTALY
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DECLARATION
I ……………………., the undersigned, hereby declare that this is my own and personal
work, except where the work(s) or publications of others have been acknowledged by
means of reference techniques. I have read and understood the examination
requirements regarding technical and presentation requirements, referencing
techniques and plagiarism.
Name:
Student number:
Date :
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QUESTION 1 [10 marks]
Explain, with reference to a graph, how under a managed floating exchange rate
system of the type in operation since 1973, monetary authorities can intervene in
foreign exchange markets to moderate a depreciation or appreciation. Refer to a
graph in the prescribed book and name the graph. You do not have to draw the
graph
Managed Floating System
Under managed floating system country’s monetary authorities can intervene in the
foreign exchange markets to smooth out short-run fluctuations in exchange rates. They
adopt the policy of leaning against the wind- by supplying part of the excess demand or
absorb part of the excess supply of foreign exchange in the market to reduce the short
run fluctuations. However if the rules of leaning against the wind are not clearly defined,
a country might be tempted to keep the exchange rate high (undervalued) to stimulate
its exports. This is a disguised beggar thy neighbor policy and invites retaliation by other
nations when they face an increase in their imports and a decrease in their exports. This
is sometimes referred to as dirty floating. Thus in the absence of clearly defined and
adhered to rules of behavior, there is the danger of distortions and conflicts that can be
detrimental to the smooth flow of international trade.
The present system of managed floating exchange rates came into effect by default at
the end of the short-lived Smithsonian system in 1973. It was initially deemed to be a
temporary informal arrangement that would soon be replaced by a more structured
system, but it accepted as the de facto international payments mechanism and was
formalized by IMF conference in Kingston, Jamaica in 1976. The main features of the
new arrangement were as follows:
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