Question 1

Small countries as Iceland is being measured by population and financial output were more

sensitive to global capital movements. Nations like Iceland and New Zealand and really hyper-

sensitive in the worldwide markets consider them to be moderately steady and low-risk nation

markets, which makes them become more attractive as potential recipients of short-term capital

investments. The affectability of a nation like Iceland is enhanced in view of relative size. For

instance what are consider moderately little responsibilities of capital by speculation banks,

worldwide enterprise or cash directors in New York and London. In a brief period time can wind

up truly suffocating a littler open business sector like Iceland.

Question 2

Direct intercession in currency markets, in which the central bank of a nation purchases or offers

its own particular currency to seek after monetary policy has been generally resulting impact in

numerous business sectors by fiscal approach and its subsequently effect on interest rates. A

small nation may ensure its currency esteem by raising interest rates to give higher return to

worldwide financial specialists. This then pulls in capital inflows into the nation and as result, the

outside cash and capital must be first traded into local cash- pushing interest for the nearby

currency up. Furthermore, managing or expanding its currency esteem. The drawback of this

policy, however be that as it may is that as interest rate rise, it increment the expenses of getting

by all organizations in the residential economy. The outcome is frequently to secure the cash to

the detriment of development in the residential economy. In small nations like Iceland this is

again amplified as many of the local businesses often have few attractive alternatives for raising

capital especially debt capital at moderate rate.

Question 3

As indicated by impossible trinity theory, a country can pick two of the accompanying three

choices, free capital movement, autonomous monetary policy or fixed exchange rate. The reason

is that if a nation chooses to permit free capital development and keep up a fixed conversion

scale, financial arrangement will be bound by the fixed trade rate and will subsequently be in the

hands of the central bank of the national to which the money is pegged. An interest rate hike

implemented to battle inflation for instance will make capital flow into the nation and the

currency will appreciate which is against with the fixed exchange rate policy. Iceland have

chosen to allow free movement of capital, yet the Iceland government has elected to maintain

monetary policy. This incites a financial alteration in light of the fact that of the deteriorating

competitive position resulting from an increasing real exchange rate, which curtails GDP growth

in the long run. Iceland seeks to anchor inflation expectations through a formal inflation target

and systematic, transparent monetary policy conduct.

Question 4

The boom in the Iceland economy was comes from the driver of the current account trade deficit.

During times of rapid economic growth, imports typically grow much faster than exports,

resulting in a current accounts deficit which is then reflected in a capital or financial account

surplus, as net foreign capital flows into the country and economy. Rapid economic expansion

and inflationary pressure then triggers central bank money related approaches which moderate

fiscal development, drive up interest rate, attracting foreign capital and in any event for the short

to medium term expanding the quality of the currency value.

But the line between supportable development and excessively quick financial development

between successful utilization of remote capital and the weight also the expenses of over

obligation is without a doubt a scarce difference. In the event that Iceland were an organization,

the organizations rising obligations load, its advantage expenses and over-obligation is without a

doubt a scarce difference. In the event that Iceland were and organization, the organizations

rising obligation loads, its advantage expenses and obligations admiration challenges, abruptly

get to be onerous and the business wellbeing and sustainability come into question.