GLOBAL ECONOMY 5

Prepare a 200–250 word answer for each question, and submit all four responses in one Microsoft Word (or compatible) document. Question 1: (a) The closing case on page 349 of the textbook explains how the stronger dollar in the 1980’s hurt Caterpillar’s competitive position, but in 2008, a stronger dollar did not seem to have the same effect. What had changed? (b) How did Caterpillar use strategy as a “real hedge” to reduce its exposure to foreign exchange risk? What is the downside of its approach? Question 2: The IMF has often been criticized for the policy prescriptions that were implemented to address nations facing economic and financial crisis. List and discuss the criticisms of the recent IMF policies. Question 3: Why has the global capital market grown so rapidly in recent decades? Do you think this growth will continue throughout the next decade? Why? Question 4: (a) Explain the difference between “hot money” and “patient money.” Why might a country wish to attract one type over the other? What are the costs and benefits of each? (b) What is the difference between a spot exchange rate and a forward exchange rate?