Exercise 9

The "open economy trilemma" suggests that open economies cannot simultaneously achieve which three economic policies?

• High inflation, Low unemployment, and Fiscal discipline

• Free trade, Balanced budgets, and Price stability

• Economic growth, Low taxes, and Full employment

• Fixed exchange rates, Monetary autonomy, and Unrestricted capital mobility

Which of the following was NOT one of the core "rules of the game" under the international Gold Standard?

• Governments should actively manage exchange rates through monetary intervention.

• Currency must be freely convertible to gold at a fixed price.

• There should be no restrictions on capital or gold flows between countries.

• Money should be convertible into gold upon request, backed by gold reserves.

Did you do the homework?

• Yes

• No

According to the historical lessons discussed in the article, which factor is most crucial to the long-term stability and success of a managed floating exchange rate system, as it currently exists?

• The establishment of international credit unions to stabilize exchange rate volatility.

• Coordinated bilateral agreements to maintain fixed currency pegs between major economic powers.

• Credible commitment by central banks to adhere strictly to a low and predictable inflation target.

• Adoption of strict capital controls to prevent speculative capital movements.

The authors argue that the Eurozone shares certain structural weaknesses with the Bretton Woods system. Based on their analysis, which feature is a major source of instability for both systems?

• A single global reserve currency leading to the Triffin dilemma

• The inability of peripheral countries to perform currency devaluations, creating adjustment problems

• An absence of credible monetary anchors causing uncontrolled inflation

• Excessive fiscal integration leading to inefficient redistribution