Chapter 2, Question 17

Triffin Dilemma.

Triffin Dilemma is the conflict that may arise when the currency of certain country become
global reserve currency. If a currency rises to the status of global reserve currency, the country
will be forced to run current account deficit that take the country into indebtness that effect the
growing of the currency quantity in global market. At the same time, because of the deficit
balance of payments, it will affect the economy growth of the country as the increase in import
will increase the unemployment rate of that particular country. But, at the same time, the
advantage of the deficit in balance of payment will show that the investment of the country is
more that the saving which is the country will get high return in the future.

From the Chinese yuan currency case, at first, China have a large current account surplus that
make China able to invest in foreign countries and build up foreign exchange reserves. When
this situation happen, China will be the global currency reserve. So, it will be create trade
deficit. The deficit of BOP happen when China create trade deficit with another country like
U.S as the U.S import more goods and services from China because China have low cost of
production. The conflict arise when they have to choose the domestic objective to maintain the
balance of balance of payment or to fulfil international policy objective. It very difficult to
control current account surplus and current account deficit at the same time. So to make the
export more competitive, they always keep their currency undervalued. To maintain their
currency value and also their economy growth, China had choose fixed rate regime to prevent
overpriced of yuan and to sustain their profit to domestic company and increase the standard
living of China.

Chapter 6, Problem 16

a. Fisher effect formula

Nominal rate= [(1+r)x(1+)]-1 , r = real interest rate, = expected inflation
0.045= [(1+r)x(1+0.0125)]-1
1.045= (1+r)x(1.0125)
1.0321=1+r
r = .0321 @ 3.21% the real interest rate in U.S
 because of the fisher effect, the real interest rate in New York and London are same.
So, expected inflation in Europe is:
0.039= [1+0.0321)x(1+ )-1
1.039= 1.0321 x(1+ )
1.00669= 1+
= .00669 @ 0.669%

360
[1+((($)( ))] $1.3264 1.045
$/ $/ 360
b. = 360 = = $1.3341 /
[1+((()(360))] 1.039