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QUESTION TWENTY
The Bank of Zambia’s monetary policy committee lowered its policy rate by 125 basis points to 8%
on 18th August responding to the growing COVID-19 crisis. Discuss what would happen to all the
necessary components of the Balance of Payment for Zambia. Please, explain clearly how this would
affect the exchange rate. [15 marks]
QUESTION NINETEN
Suppose the income levels of our small country, Zambia suddenly increases fromY1 to Y2, use the
monetary approach to explain this change adequately. If on the other hand, we assume that Zambia
uses a pegged exchange rate, show using the monetary approach how such a sudden upswing in income
would affect the BOP and the economy at large. If you feel that there is need to illustrate the scenario
above graphically, you can draw a well-labelled graph. [15 marks]
QUESTION ONE
a. What is economic integration?
b. Briefly discuss the history of SACU and its functions.[15 marks]
QUESTION SEVENTEEN
There are different financial instruments to hedge the exchange rate risk. The main text mentions three
financial instruments: forwards, swaps and options. Explain what these instruments entail and which
of them is most fit to secure that at a specific time a certain amount of foreign currency can be
exchanged to local currency against a predetermined exchange rate. [15 marks]
QUESTION SIXTEEN
Suppose you own a car assembly line in Zambia. The different parts of the car are imported
from the South Africa and the assembled cars are exported back to the South Africa.
a. What happens to the price of the imports when the Zambian kwacha depreciates?
b. Does your car become more or less attractive for South African consumers when the
Zambian kwacha depreciates? Explain.
c. As a Zambian producer, do you think the depreciation of the kwacha is a good
thing? [15 marks]
QUESTION FIFTEEN
On Monday the 1" of November 2004 the dollar/euro exchange rate was 1.2748 and the dollar/euro 12
months forward exchange rate was 1.2717.
a. Calculate the annual forward premium of the euro and the dollar.
b. Explain whether the forward premium indicates that investors expect the curo to appreciate or
depreciate in the future.
c. If you expect that the euro will appreciate in the future, should you buy or sell a forward euro
contract? [15 MARKS]
Discuss practically how the coronavirus has affected international trade. [15 marks]
QUESTION ELEVEN
Suppose Zambia is a small, open economy that has a competitive market for soya beans with a
domestic supply curve is, P = 2Qs and the domestic market demand curve is P+ Qd = 120. On the
world market, soya beans sells for $30 a unit (50kg bag). (Hint: 10 hectograms=1000grams)
a. How much hectograms of soya beans does Zambia import?
b. How much revenue will be raised by a tariff of $10 per unit of soya beans?
c. What is the deadweight loss associated with the tariff?
d. Suppose that instead of a tariff, Zambia creates a quota limiting the number of imports
to only 15 units. How much grams of soya beans will be consumed in Zambia? [15 marks]
QUESTION TEN
a. Muchuu’s old corolla emits a lot of carbon such that it contaminates the entire compound. This
carbon emission state is closely related to two (2) depravities that are closely related to what was
coined by Arthur Okun sometime in the 1970s to measure America’s economic health. Recall
yourlecture notes and comprehensively show how America would benefit through policy
coordination.
b. Kindly use any suitable model that you learnt in class to give an intuitive economic
illustration/interpretation of bilateral trade and how some parameters are econometrically
measured.[15 marks]
QUESTION NINE
Malawi and Zambia both produce masks and sanitisers. Suppose that a Malawian worker can produce
50 masks per hour or 1 sanitiser per hour. Suppose that a Zambian worker can produce 40 masks per
hour or 2 sanitisers per hour.
a. Which country has the absolute advantage in the production of each good?
b. Which country has the comparative advantage?
c. If Malawi and Zambia decide to trade, which commodity will Zambia trade to Malawi? Explain.
d. If a Zambian worker could produce only 1 sanitiser per hour, would Zambia still gain from trade?
Would Malawi still gain from trade? Explain.[15 marks]
