- After reviewing chapter 2, please complete the Mini-Case “Iceland-A Small Country in a Global Crisis” at the end of chapter 2.
- The answers to the Mini-Case questions must be comprehensive (one sentence answers will not get you full credit) using data from the chapter, as well as, outside research on the topics.
- After answering the case questions, write a concluding paragraph of your analysis and evaluation of the case. The conclusion must be comprehensive and supported by information from the text, resources, or your own research.
- Proper APA formatting of in-text citations and references.
Here are my answers to the questions I just need APA format and references added as well as a conclusion paragraph
- A country that is relatively smaller in population size and economic output, is definitely more sensitive to global capital movements. A small country is hyper – sensitive meaning, it is viewed as a stable and low risk market by global markets, making them more lucrative as potential recipients of short – term capital investments. Capital investments that are relatively small, made by investment banks and global corporations, can literally drown a smaller market like Iceland in a short span. Fluctuations in capital flow in and out of a small country are relatively sizeable compared to GDP in case of a small country, distorting balance of payments. We can say that the economic size of a country amplifies its relative sensitivity to the potential impacts of global capital movements.
- In many markets, monetary policy and its resulting impact on interest rates have replaced direct intervention in currency markets, wherein the central bank of a country buys/sells its own currency to achieve economic objectives. A small country can safeguard its currency value by raising interest rates providing higher returns to global investors. This leads to increased capital inflows into the country, after which the foreign currency is first exchanged into domestic currency pushing the demand up for the local currency and thus maintaining improving the value of domestic currency. The drawback of this policy, however is that as interest rates rise, it increases the cost of borrowing by business in domestic economy. This leads to the currency being protected at the expense of growth in the domestic economy.
- As per the impossible trinity we can have only 2 out of the following at a time –
A. A fixed exchange rate.
B. No capital control.
C. Independent monetary policy.
In the case of Iceland, a fixed exchange rate and no capital control should have been chosen. Fixing the exchange rate would have implied that the government was counteracting the forces of the market. No capital controls would mean free currency and capital exchange anywhere in the country.
4. The current account deficit was driven by the boom in Icelandic economy. Imports grew faster than exports during the period of rapid economic growth. This resulted in current account deficit manifested as capital account surplus. Monetary policies triggered by economic expansion and inflationary pressures slowed the monetary growth, driving interest rates up, and increasing the value of domestic currency – at least for the short to medium term.
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