Instructions

This examination counts as 30% of your grade for the course.  You will write your exam at home, taking advantage of your notes, reference materials, library resources and textbooks. Any and all resources must be given full attribution.

You may not collaborate with your classmates in preparing your answers .  If you do share your answers or ideas with other members of the class or solicit outside help in preparing your paper, you will fail the exam.  At the end of the paper, please write the following and sign your name: “This paper is my  own original work, and all of the ideas contained in it are my own.  Any outside sources that I have used have been given full credit.” Without this statement , I will not grade the paper .

Answers are limited to three (3) sides of 8- 1/2 by 11-inch paper.  All exam papers should be submitted in Adobe Acrobat (PDF) format.  You should set your page size to U.S. Letter size, and use a 10-point or larger font for your answers.  Micro-mini fonts on ultra-magnified PDFs are not acceptable . Be concise! Do not expect to get an “A” by reproducing every lecture note.  Part of the challenge is to fit your answers into a limited space.  The best papers will selectively apply only the key materials from the class to the problem.

Remember that your answers must be oriented around topics covered in this class. This is not a class in international relations!

Finally, do not even think about using generative AI to formulate your answers.  It will not work.  You may use AI-driven editing software to improve your writing, but your ideas must be your own .

Exam papers must be submitted by 6:20 p.m. (EDT) Tuesday, March 12 , by e-mail to [email protected].  Late papers will not be accepted for any reason whatsoever .

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We all know that Ukraine has severe economic problems after two years of war within its borders . You  may accept these facts as conditions for answers to this exam:  The current account is in deficit.  Foreign exchange reserves are low.  The currency is pegged by central bank action.  Payments are due on the nation’s $150 billion foreign currency debt.  GDP is contracting, unemployment is high and rising.  The current account is in deficit.

Well-intentioned foreigners want to help.  The European Union is offering a package of aid to Ukraine to  help rebuild its economy.  It includes €2 billion in industrial reconstruction credits to the government.  These credits are 30-year loans at 2% interest that can only be used for purchases of industrial equipment  from EU producers.  The EU governments will also pre-pay another €1 billion in natural gas purchases from Ukraine .  Finally, the EU governments offer a €100 million technical assistance grant for Ukraine to hire Euroland experts on infrastructure reconstruction .  The bad news is an Italian bank has decided to call due —rather than roll over —some loans to Ukraine’s government.  When the loans are repaid on June  15, €50 million in principal plus a quarterly interest payment of €1 million will come due.  For this exam, assume Ukraine is operating on its production possibility frontier —full employment of capital and labor — and Euroland’s economy has excess capacity and unemployment.  For all questions, assume the hryvnia — Ukraine’s currency —has a fixed exchange rate and is not easily convertible to dollars or euros in the open  market.

1.  How would Ukraine account for each of these transactions in its balance of payments?  Assume the bank loans are repaid by putting bags of euros on a train to Rome .  All other payments will be settled through the banking system.  Where would the Ukraine get euros to put in those bags, by the way?  (10 points) (HINT:  This is an accounting question, not a behavioral question!)

2.  Will this package of grants, loans , and technical assistance help close Ukraine’s current account deficit? How will the official settlements balance be affected immediately after the package is announced?  Over time?  If there are no monetary or fiscal policy changes , and the exchange rate is not changed , is there some mechanism that will push Ukraine’s external accounts back to balance even without this package?  How will Ukraine’s foreign currency reserves and money supply adjust along with changes to the balance of payments?  Why?  (10 points)