Final Exam Questions — Economics 4131, Spring 2006
1. Explain how the gold standard operated in the classical period (1870-1914). What were
the advantages and disadvantages? Some say the gold standard sacrificed internal balance
to external balance. How? What were the “rules of the game” and what would happen
when they were violated? What would happen when the demand for monetary gold rose
faster than the supply, and why was this a problem?
2. Explain the functioning of the Bretton Woods currency arrangement. Why was it
designed as it was? What strains appeared over time, and what factors led to its collapse?
What was “Triffin’s dilemma”?
3. Use the national income accounting identity to explain the phenomenon of “twin
deficits.” Explain how the surge in the U.S. fiscal deficit has spilled into a need for
international finance. What are the current sources of this finance? Describe the dilemma
facing the Asian central banks. Describe the “hard landing” scenario. What needs to be
done to ensure a “soft landing”?
4. Explain step-by-step why and how a central bank might w…
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