Author Question: Explain the difficulties in regulating international banking. What will be an ideal ... (Read 109 times)

Destiiny22 · **on:** Jun 30, 2018

Explain the difficulties in regulating international banking.

What will be an ideal response?

Question 2

Using the II-XX framework, show using a figure that fiscal policies by themselves cannot bring the economy to both internal and external balances.

What will be an ideal response?

komodo7 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

(1 ) No deposit insurance, in particular, inter-bank deposits are unprotected
(2 ) Absence of reserve requirements
(3 ) bank examination more difficult to enforce
(4 ) not clear which group of regulators has responsibility for monitoring a given bank's assets
(5 ) not clear which central bank, if any, is responsible for providing Lender of Last Resort assistance.

Answer to Question 2

Starting at point 2, fiscal policy is shown as only horizontal movements. This means that the economy can reach either point 3 (internal balance) or point 4 (external balance) in the figure, but not both internal and external balances. Only a devaluation of the currency accompanied with an increase in fiscal ease, namely increasing government expenditures or decreasing taxes, will move the economy to both internal and external balances at point 1 in the figure.