SEC

$3$

$5$

$2$

$$MAKEUP $$TEST$.$

$1$

$$HOUR$.$

Explain $$the $$problems

$/$

shortcomings $$of $$the $$Purchasing $$Power $$Parity $$

$($

PPP

$)$

$$Theory$.$

$($

$3$

$$marks

$)$

Using $$the $$concept $$of $$exchange $$rate $$overshooting$,$analyze $$the $$impact $$of $$an

unexpected $$increase $$in $$the $$nation$\text{'}$s $$money $$supply $$coupled $$with $$a $$decline $$in

domestic $$interest $$rates$.$

Your $$analysis $$should $$cover:

a

$.$

$$The $$short

$-$

term $$and $$long

$-$

term $$effects $$on $$the $$exchange $$rate$.$

$($

$6$

$$Marks

$)$

b

$.$

$$The $$difference $$in $$adjustment $$speed $$between $$financial $$asset $$portfolios $$and

merch

$$

ndise $$trade $$flows$.$

$($

$2$

$$marks

$)$