School of Economics and Management /HES
Exam International Financial Markets (IFM)
Exam Code IFMVH2EL05
Semester : 2
Date: 27 May 2011
Time: 11:45 – 13:45
Lecturer: C. Rensen (REC)
Allowed: dictionary, writing materials
The exam contains 15 open questions (3 points each; your grade = (Total number of points + 5) / 5
* Write your name, group and student number on every separate answer sheet you use. * You may take this question booklet with you when you leave.
EXPLAIN YOU ANSWERS PROPERLY!!!
From the Financial Times, May 5 2011: Euro falls as Trichet signals no rate rise The euro retreated sharply from a 17-month peak against the dollar and a 13-month high against the pound as Trichet, president of the European Central Bank, signaled that the interest rate on the main refinancing operations would remain on hold next month. Analysts said the single currency had received support in recent weeks since the ECB, in contrast to the Federal Reserve and the Bank of England, was seen as being ready to tighten monetary policy further in the coming months in a bid to stem inflationary pressures in the eurozone. 1. What’s meant with the statement that the single currency (euro) had received support in recent weeks since the ECB was seen as being ready to tighten monetary policy further in the coming months in a bid to stem inflationary pressures in the eurozone? 2. Explain why the euro depreciated against the dollar as Trichet signaled that the euro zone interest rates would remain on hold next month. 3. Explain how the ECB can stem inflation pressure by increasing the interest rate on the main refinancing operations. A month earlier Mr. Trichet explained that the gradual increase in the growth rate of the money stock (M3) might facilitate the accommodation of price pressure (inflation) in the eurozone. 4. Explain how an increase in the growth rate of the money stock can increase inflation pressure in the eurozone. Turning to fiscal policies, Mr. Trichet stated that all eurozone governments should achieve the consolidation targets for 2011 that they have announced. Strict tightening of fiscal policy would help to convince the general public that the corrective policies will be sustained. Confidence in the sustainability of public finances is essential as this will reduce interest rate risk premium and improve the conditions for sound and sustainable economic growth. 5. What’s the meaning of governments conducting a strict tightening of fiscal policy? 6. Explain why achieving the consolidation targets will reduce the interest rate risk premium and why this will improve the conditions for sustainable economic growth.
FRANKFURT/ATHENS, May 12 2011 (Reuters) - Despite bailouts for Greece, Ireland and Portugal, Europe's debt crisis may yet spread to core euro zone countries and emerging Eastern Europe, the International Monetary Fund said on Thursday. The warning came as government sources in Athens said international inspectors checking on Greece's compliance with its EU/IMF rescue package had found problems and were pressing for deeper spending cuts to cover a likely revenue shortfall. "Contagion to the core euro area, and then onward to emerging Europe, remains a tangible downside risk, the IMF said. A Reuters poll of investors and economists showed an overwhelmingly majority believe Greece will restructure its debt, possibly as soon as later this year. Most fund managers expect Athens to pay back less than half of what it owes. The IMF said it stood ready to provide more aid to Greece if requested, but the country that triggered Europe's sovereign debt crisis in 2009 still had plenty of untapped potential to raise extra cash itself though privatizations.
7. Describe how Europe’s debt crisis may yet spread to the (healthy) core eurozone countries (like Germany and the Netherlands) if Greece, Ireland and Portugal are not...