Question

1. In the early 90s Argentina adopted a currency board, fixing the peso to the USD. What was the main motivation for this?

		to enhance export competitiveness
		to join the United States as a territory
		to tame inflation
		to create an overvalued real exchange rate

2. While inflation fell and stabilized, Argentina ran growing current account deficits through the 90s. What was the primary cause of this?

		overvalued real exchange rate
		financial contagion from East Asian Crises
		growing government budget surplus
		primary export commodity price spike

3. Together with large current account deficits, the Argentine government began running increasingly large budget deficits. How might this be structurally related to the choice of a fixed exchange rate regime?

		deficits were needed to finance capital outflow at the established rate
		with no monetary policy, fiscal policy became the only macroeconomic policy tool to fight recessions
		fiscal profligacy had nothing to do with the exchange rate, Argentina's political leadership was as irresponsible as its monetary leadership had been
		the debt allowed Argentina's government to import arms for an attempt at another war with Brittain

Answer 1

1. to tame inflation

• The main reason behind it was to eliminate hyperinflation and thus stimulate economic growth
• It cause behind the inflation was poor or negative GDP growth.