1. Lecture 8 spelled out the basic monetary trilemma for open economies. Of the three goals that most countries shareindependence in monetary policy, stability in the exchange rate, and the free movement of capitalonly two can be reached simultaneously. Critically assess the policy trade-offs presented by the monetary trilemma for open economies. Discuss the challenges faced by developing countries in maintaining exchange rate stability, monetary autonomy, and capital mobility simultaneously. Consider the arguments for and against reinstating restrictions on capital mobility in developing countries to address these challenges. (8points)
2. Given the proposed "prophylactic" measures to reduce the risk of financial crises in developing economies, analyze the potential effectiveness and challenges associated with each measure. Specifically, evaluate the role of transparency, stronger banking systems, enhanced credit lines, and a shift towards equity capital inflows in preventing or mitigating currency crises. Discuss how these measures might impact the decision-making of investors and governments in the face of economic uncertainties. (9 points)