Question: 1. Many countries experiencing high and rising inflation, or even hyperinflation, will adopt a fixed exchange rate regime. Discuss the potential costs and benefits of a fixed exchange rate regime in this case. Comment on fiscal discipline, seigniorage, and expected future inflation.
2. In the late 1970s, several countries in Latin America, notably Mexico, Brazil, and Argentina, had accumulated large external debt burdens. A significant share of this debt was denominated in U.S. dollars. The United States pursued contractionary monetary policy from 1979 to 1982, raising dollar interest rates. How would this affect the value of the Latin American currencies relative to the U.S. dollar? How would this affect their external debt in local currency terms? If these countries had wanted to prevent a change in their external debt, what would have been the appropriate policy response, and what would be the drawbacks?