Third (and Last!) Test

Part I: The Aggregate Supply & Demand Macro Model

Section A: Multiple Choice questions (3 points each for a total of 12 points) (Answer all)

• a sudden, exogenous increase in the cost of a basic good like oil
• a deterioration in the capital stock due to inadequate public investment
• productivity raising technological changes brought on by government subsidies to research and development
• a post-war expulsion of women from waged jobs to make room for returning soldiers

• the Batavian economy is well below capacity and is operating on the flat portion of its AS curve.
• the monetary authority in Batavia has been reducing the money supply to keep interest rates high.
• all wages in the Batavian economy are set by explicit contracts that last for a minimum of a year.
• the Batavian economy is very close to capacity and is operating on the steep portion of its AS curve.

• the sudden flood of petrodollars into world financial markets would drive down interest rates, stimulating investment and growth
• the increase in the price of oil would raise production costs and shift the aggregate supply curve upwards which would tend to raise price levels and reduce the level of economic activity.
• the ability of workers to force up money wages in the face of rising prices would shift the aggregate demand curve to right putting further upward pressure on the price level
• all of the above

• the continuing flood of cheap imports would hold down the costs of production and thus accelerate any tendency of the aggregate supply curve to rise
• the growing deficit would push the aggregate demand curve to the left lowering, ceteris paribus, the equilibrium level of economic activity
• worker anger over cheap imports would stir unrest raising production costs and shifting the aggregate supply curve upward, creating inflationary pressures.
• worker delight in cheap imports and the consequent rise in real wages will limit wage demands and keep the aggregate supply curve from shifting up.

Section B: Essays
(Answer one of the following for 12 points)

a) The AD curve which specifies the relationship between the aggregate level of demand and the general price level is derived from several Keynesian constructs, beginning with the demand for money when it is specified as Md = f(i, Y, P), namely when it takes into account the effects of the price level on the demand for money. The assumption is that dM/dP >0, that is as the price level rises, the demand for money rises. But, with a given supply of money an increase in the demand for money will increase interest rates, which as we know from the MEC (marginal efficiency of capital curve) will lower investment, and ceteris paribus lower equilibrium level of output. So, a higher level of prices will be associated with a lower level of output and the AD curve will be downward sloping. Graphically the AD curve can be derived beginning with the Keynesian cross model or the IS-LM model.

b. The impact on AD (and hence on Y) of a general rise in the expected rate of return on investment is positive because such a rise shows up in the model as an upward shift in the MEC curve. Therefore at any price level and associated level of interest the level of investment will be greater, and thus too Y. So such a rise translates into not only a shift in the MEC curve but a rightward shift in the AD curve.

c) Elements: deregulation to reduce costs, tax cuts to increase after tax profits. One might also say the general pro-business climate of the Reagan regime would raise expected rates of return.

7. a) Explain why the aggregate Supply (AS) curve can NOT be understood as the sum of individual firms' supply curves. b) Having excluded this understanding, what IS the rationale for the AS curve? c) Finally, using a graph and words explain the usual rationale for the usually postulated shape of the AS curve.

a) The AS can NOT be understood as the sum of the individual firms' supply curves because those individual supply curves are derived under the assumption that all other prices remain the same, thus no substitution or other effects are possible. In the case of the AS curve where we are dealing with a change in the average price level, we know nothing about changes in relative prices, some might rise, some fall and such changes would have an impact on the individual supply curve

b) The usual rationale for the AS curve concerns the responsiveness of business in general to changes in the price level, at varying levels of economic activity. The AS curve displays the results of a complex set of situations and changing relative prices but is not strictly derivable from aggregation. There is disagreement over both the logic of the concept and the shape once the concept is accepted. Moreover, there is a distinction in contemporary analysis between the short run curve (upward sloping) and the long run curve (vertical) in which the former is considered distinct from the latter because of lags in the changes of input prices vis a vis changes in the overall price level. c) In general it is argued that firms respond to rising prices by raising out put, but by how much they raise output will vary with the overall level of economic activity. At low levels (depression) they will respond little, if at all, a intermediary levels they will be more responsive and as the level of economic activity reaches the maximum full employment level they will be able to raise out put only with difficulty, i.e., with rapidly rising costs which require ever high prices to offset, thus the AS curve approaches the vertical circa full employment.

Part II: Policy Problem w/model
(Answer the indicated questions for 40 points)

Dealing with the Trade Deficit

Your candidate has asked you to evaluate some policy changes others have suggested that would reduce the trade deficit and mollify potential (labor) voters. These are:

1. One suggestion is to increase the marginal tax rate.
2. Another is to decrease government expenditures.
3. A final is to reduce the money supply.

Your candidate wants to know which of these will reduce the trade deficit the most?

To answer this query you have available to you the following elements to build a macroeconomic model:
A consumption function: C = 789.225 + .75Yd - 50P (Yd = Y - T, and P = the price level)
A tax function: T = -170.15 + .216Y
An investment function: I = 986.76 + .1Y - 50i - 40P (i = interest rate, P = the price level)
A money demand function: i = 82.978 - .07Md (where Md = money demand)
An import function: M = 328.26 + .1Y
An aggregate supply function: P = 1.07516 + .0001Y

You also know that government expenditures are expected to = $1,628.7 billion, exports are expected to = $996.3 billion and the Fed is expected to hold the money supply at $1,125.4 billion.

Solve one of the following (questions 8, 9 or 10, preferably 8 because you get the most points that way):

8. Using these elements find the currently expected equilibrium levels of Y, prices and interest rates by deriving an aggregate demand function and combining it with the aggregate supply function. (20 points)

Y = C + I + G + X - M
Y = 789.225 + .75[Y - (-170.15 + .216Y)] - 50P + 986.76 + .1Y - 50[82.978 - .07(1125.4)] - 40P + 1628.7 + 996.3 - [328.26 + .1Y]
Y = 789.225 + .75[Y + 170.15 - .216Y)] - 50P + 986.76 + .1Y - 50(82.978) + (50).07(1125.4) - 40P + 1628.7 + 996.3 - 328.26 - .1Y
Y = 789.225 + .75Y + .75(170.15) - .75(.216Y) - 50P + 986.76 + .1Y - 4148.9 + 3938.9 - 40P + 1628.7 + 996.3 - 328.26 - .1Y
Y = 789.225 + .75Y + 127.6125 - .162Y - 50P + 986.76 + .1Y - 4148.9 + 3938.9 - 40P + 1628.7 + 996.3 - 328.26 - .1Y
(1 - .75 + .162 - .1 + .1)Y = 3990.3375 - 90P
.412Y = 3990.3375 - 90P
Y = 3990.3375/.412 - 90P/.412
Y = 9685.2851 - 218.4466P [which is the aggregate demand curve]

Combining the aggregate demand curve with the aggregate supply curve: P = 1.07516 + .0001Y
Y = 9685.2851 - 218.4466(1.07516 + .0001Y)
Y = 9685.2851 - 234.86504 - .0218446Y
1.0218446Y = 9450.4201
Y = 9450.4201/1.0218446
Y = 9248.3926 [which is the equilibrium level of income]

Substituting this Y into the aggregate demand function Y = 9685.2851 - 218.4466P gives:

9248.3926 = 9685.2851 - 218.4466P
9248.3926 - 9685.2851 = - 218.4466P
-436.8925 = -218.4466P
-436.8925/( -218.4466) = P
1.9999967 = P = 2.0

The interest rate can be found by simply substituting the money supply into the money demand function:

i = 82.978 - .07(1125.4)
i = 82.978 - 78.778
i = 4.2

If this is recognized right at the beginning, then the original solution for the aggregate demand curve can be simplified by substituting 4.2 for 82.978 - .07(1125.4) in the original equation. The results will be the same with fewer calculations.

9. If you have not learned how to do this, you can earn partial credit by assuming a price level of 2.0 and by deriving IS and LM curves and combining them to find the equilibrium level of income and interest rates. (15 points)

Y = C + I + G + X - M
Y = 789.225 + .75[Y - (-170.15 + .216Y)] - 50(2.0) + 986.76 + .1Y - 50i - 40(2.0) + 1628.7 + 996.3 - [328.26 + .1Y]
Y = 789.225 + .75Y + 127.6125 - .162Y - 100 + 986.76 + .1Y - 50i - 80 + 1628.7 + 996.3 - 328.26 - .1Y
(1 - .75 + .162 - .1 + .1)Y = 4020.3375 - 50i
.412Y = 4020.3375 - 50i
Y = 4020.3375/.412 - 50i/.412
Y = 9758.1007 - 121.35922i [which is the IS curve]

The LM curve can be found by simply substituting the money supply into the money demand function:

i = 82.978 - .07(1125.4)
i = 82.978 - 78.778
i = 4.2
[This is the LM "curve" and also the equilibrium rate of interest.]
[Note: here is the peculiarity. Because in this model money demand is not a function of Y, there is no Y in the equation for the LM curve. It is horizontal at the level of the interest rate. A change in the money supply, however, does have the effect of changing the LM curve and hence both equilibrium interest rate and equilibrium level of economic activity.]

By combiningg the IS and LM curves, we can find the equilibrium level of economic activity Y:

Y = 9758.1007 - 121.35922(4.2)
Y = 9758.1007 - 509.70872
Y = 9428.392 [This is the equilibrium level of economic activity.]

10. If you have not learned how to do either of the above you can still earn partial credit by assuming a price level of 2.0 and by using the Keynesian cross approach to solve for the equilibrium level of income and interest rates. (10 points)

Y = C + I + G + X - M
Y = 789.225 + .75[Y - (-170.15 + .216Y)] - 50(2.0) + 986.76 + .1Y - 50[4.2] - 40(2.0) + 1628.7 + 996.3 - [328.26 + .1Y]
Y = 789.225 + .75Y + 127.6125 - .162Y - 100 + 986.76 + .1Y - 50[4.2] - 80 + 1628.7 + 996.3 - 328.26 - .1Y
Y = 789.225 + .75Y + 127.6125 - .162Y - 100 + 986.76 + .1Y - 210 - 80 + 1628.7 + 996.3 - 328.26 - .1Y
(1 - .75 + .162 - .1 + .1)Y = 3810.3375
.412Y = 3810.3375
Y = 3810.3375/.412
Y = 9248.3919 [This is the equilibrium level of economic activity.]

Answer all the following: (11-15)

11. Once you have solved for the equilibrium income (which is approximately $9,248.4 billion [actual the US level in 1999]) and the price level (2.0) and interest rate (4.2 percent): calculate the trade balance to determine the size of the trade deficit. (5 points)

X = 996.3
M = 328.26 + .1Y
M = 328.26 + .1(9248.3919)
M = 328.26 + 924.83919
M = 1253.0991
X - M = 996.3 - 1253.0991
= -256.7991 = trade deficit

Using whatever you need from what you have discovered so far, calculate by how much each of the suggested policy changes would reduce the trade deficit:

12. Increasing the marginal tax rate from .216 to .3. (4 points)

If you answered Question #8 then the calculation of the AD curve will change to: Instead of starting at the beginning we can short-circuit the process by substituting .3 for .216 towards the end
(1 - .75 + .75(.216) - .1 + .1)Y = 3990.3375 - 90P
(1 - .75 + .162 - .1 + .1)Y = 3990.3375 - 90P
(1 - .75 + .75(.3) - .1 + .1)Y = 3990.3375 - 90P
(1 - .75 + .225 - .1 + .1)Y = 3990.3375 - 90P
.475Y = 3990.3375 - 90P
Y = 3990.3375/.475 - 90P/.475
Y = 8400.7105 - 189.47368P [Which is the new, shifted, AD curve.]

Combined with the aggregate supply curve: P = 1.07516 + .0001Y
Y = 8400.7105 - 189.47368(1.07516 + .0001Y)
Y = 8400.7105 - 203.71452 - .0189473Y
1.0189473Y = 8196.996
Y = 8196.996/1.0189473
Y = 8044.573 [Which is the new, lower Y brought on by the higher tax rate]

Therefore M = 328.26 + .1(8044.573)
M = 328.26 + 804.4573
M = 1132.7175 instead of 1253.0991 which is a drop of 120.3816, deficit drops the same amount

If you answered Question #9 then the calculation of the IS curve will change to: .475Y = 4020.3375 - 50i
Y = 4020.3375/.475 - 50i/.475
Y = 8463.8684 - 105.26315i [which is the new shifted IS curve]
Y = 8463.8684 - 105.26315(4.2)
Y = 8463.8684 - 442.10523
Y = 8021.7632

Therefore M = 328.26 + .1(8021.7632)
M = 328.26 + 802.17632
M = 1130.4363 instead of 1253.0991 which is a drop of 122.6628, deficit drops the same amount

If you answered Question #10, then the calculation changes to:

.475Y = 3810.3375
Y = 8021.7631

Therefore M = 328.26 + .1(8021.7631)
M = 328.26 + 802.17631
M = 1130.43631 instead of 1253.0991 which is a drop of 122.6628, deficit drops the same amount

13. Decreasing government expenditures by 100 (4 points)

Decreasing government expenditures by 100 will drop G from 1628.7 to 1528.7

If you solved Question #8, then the calculation of the AD curve will change to: .412Y = 3890.3375 - 90P
Y = 9442.5667 - 189.47368P [Which is the new, shifted AD curve.]

Combining AD and AS:
Y = 9442.5667 - 189.47368(1.07516 + .0001Y)
Y = 9442.5667 - 203.71452 - .0189473Y
1.0189473Y = 9442.5667 - 203.71452
Y = 9238.8522/1.0189473
Y = 9067.0559

Therefore M = 328.26 + .1(9067.0559)
M = 328.26 + 906.70559
M = 1234.9655 instead of 1253.0991 which is a drop of 18.1336, deficit drops the same amount

If you solved Question #9, the IS calculation changes to:
.412Y = 3920.3375 - 50I
Y = 9515.3822 - 121.35922i [which is the new, shifted IS curve]

Combining the IS and the LM curves:
Y = 9515.3822 - 121.35922(4.2)
Y = 9515.3822 - 509.70872
Y = 9005.6735

Therefore M = 328.26 + .1(9005.6735)
M = 328.26 + 900.56735
M = 1228.8273 instead of 1253.0991 which is a drop of 27.2718, deficit drops the same amount

If you solved Question #10, then the calculation changes to:
.412Y = 3710.3375
Y = 9005.6735

Therefore M = 328.26 + .1(9005.6735)
M = 328.26 + 900.56735
M = 1228.8273 instead of 1253.0991 which is a drop of 27.2718, deficit drops the same amount

14. Reduce the money supply by 100 (4 points)

If the money supply is reduced by 100, then Ms drops from 1125.4 to 1025.4

If you answered Question #8, then (50).07(1125.4) becomes (50).07(11025.4) and 3938.9 becomes 3588.9 (a drop of 350). Therefore in .412Y = 3990.3375 - 90P 3990.3375 will drop 350 to become:
.412Y = 3640.3375 - 90P
Y = 8835.7706 - 218.4466P [which is the new, shifted, AD curve]

So that combining with the AS curve gives:
Y = 8835.7706 - 218.4466(1.07516 + .0001Y)
Y = 8835.7706 - 234.86504 - .0218446Y
1.0218446Y = 8600.9056
Y = 8600.9056/1.0218446
Y = 8417.0387 [which is the equilibrium level of income]

Therefore M = 328.26 + .1(8417.0387)
M = 328.26 + 841.70387
M = 1169.9639 instead of 1253.0991 which is a drop of 83.1352, deficit drops the same amount

If you answered Question #9, then i = 82.978 - .07(1125.4) changes to:
i = 82.978 - .07(1025.4)
i = 82.978 - 71.778
i = 11.2 [This is the LM "curve" and also the equilibrium rate of interest.]

So Y = 9758.1007 - 121.35922(11.2)
Y = 9758.1007 - 1359.2232
Y = 8398.8775 [This is the equilibrium level of economic activity.]

Therefore M = 328.26 + .1(8398.8775)
M = 328.26 + 839.88775
M = 1168.1477 instead of 1253.0991 which is a drop of 84.9514, deficit drops the same amount

If you answered Question #10, then 50(4.2) becomes 50(11.2) and -210 changes to -560, a drop of 350, so
.412Y = 3810.3375 becomes
.412Y = 3460.3375
Y = 8398.8744

ThereforeM = 328.26 + .1(8398.8775)
M = 328.26 + 839.88775
M = 1168.1477 instead of 1253.0991 which is a drop of 84.9514, deficit drops the same amount

15. Assuming that the sole policy goal is the reduction of the trade deficit which would you therefore recommend? If this was not the only goal, if, for example, your candidate was also concerned with issues of unemployment, which policy might you recommend? (3pts)

On the basis of reducing the deficit alone, the choice would be the tax increase that causes the greatest fall in the level of economic activity and imports and thus the biggest drop in the deficit. This is achieved, however, only through a severe reduction in the level of economic activity, from $9,248.4 billion to $8044.6 billion, a drop of 13 percent which would certainly result in a sharp rise in unemployment. If this is a concern then one of the other two options (or even some other option not yet suggested) would be preferable.

Part IV: Supply-side Economics
(Answer 1 of the following questions for 12 points.)

The rationale for supply-side economics was that Keynesians by laying too much emphasis on "demand" had neglected "supply" and therefore what was needed were policies aimed directly at stimulating savings, investment and growth. I have argued that this is misleading because "investment" is also "demand", the supply-siders were not ignoring demand, they were just arguing for a change in its composition to a heavier role for investment as opposed to consumption. Moreover, the Keynesians had never neglected "supply." The whole point of "demand management" was to induce investment and growth. Indeed the investment functions we have been using, of the sort I = g + fY make this explicit: growth in aggregate demand Y induces increases in investment I. Also the Keynesian productivity deals were designed to convert rising wage demand into more investment, productivity growth and growth in general. Moreover, when we examine the supply-side programs what we see is a set of policies attacking wages and the welfare state and favoring profits and investment. In other words the actual programs were redistributive of income and power from labor to business; they were aimed a reversing the shift that undermined the Keynesian period. Opinion may vary about Reagan programs, but the attack on foodstamps, legal aid for the poor, and other welfare state programs fit with this analysis. So too does the union busting of the time, the reduction of taxes for business, deregulation, especially that aimed a removing protections for labor and facilitating union busting, e.g. Chapter 11 bankruptcy. Other aspects of the programs may be a bit less clear, such as the systematic attack on environmental protections, the defunding of enforcement at the EPA by James Watt, the deregulation of financial markets to facilitate "flexibility" that opened the door to speculation (and undermined real investment) etc.

17. In practice the Reagan "supply-side" policies were combined with a contraction in the money supply. In what sense were those tight money policies "monetarist"? Using aggregate supply and demand analysis (graphs and words only) explain what was hoped for with this combination of policies and what actually happened.

These graphs illustrate how the contractionary effects of tight money, e.g., a leftward shift in the AD curve, were expected to be offset by a downward shift in the AS curve due to substantial cuts in business expenses and costs. However, in reality the leftward shift in the AD curve far outweighed any reduction in the AS curve and the result was a dramatic fall in the level of economic activity, i.e., the Reagan depression of the early 1980s that quickly became world-wide.

Part V: The International Debt Crisis
(Answer 1 of the following questions for 12 points.)

a) Some of the factors involved: oil price shocks which raised prices of imports and led many countries, e.g., Brazil, to borrow money to sustain their imports and current levels of consumption and other economic activity, resistance of people to having their standard of living reduced in the face of more expensive oil which put pressure on governments to borrow, political struggles in the fight against which governments borrowed money to finance more efficient engines of repression, efforts to "develop" through investment and expanding employment, the availability through financial recycling of large amounts of petrodollars which some wanted to use for investment but which were often borrowed to deal with civil unrest and all the other things mentioned above.

b) The changes in American economic policies that triggered the onset of the debt crisis were those aimed at fighting inflation/wages in the United States (and elsewhere). The most important was the tight money policy put in place by Carter, implemented by Volcker and intensified by Reagan who retained Volcker. But also we must count those cuts in social welfare spending which had put a floor under wages and thus provided a safety net for those fighting for higher wages. These policies had two results: higher interest rates and depression. Higher rates rippled through international financial markets to raise rates on floating rate loans to debtor countries thus greatly increasing their debt service obligations. Depression cut trade and thus made it harder for debtor countries to increase exports to earn the foreign exchange necessary to pay back the increased debt service load. Thus the crisis: more owed, less ability to pay, which led to defacto default. Crisis for not only the debtor countries but also creditor banks which were very exposed at the time.

19. a) Discuss at least three of the options available to countries faced with the inability to repay their international debt in the early 1980s. b) Which of these options was generally chosen and why didn't it resolve the crisis in short order?

a) Three options: 1) countries could declare bankruptcy and default on their debts, this option upset the banks greatly and they threatened to cut off any countries that did so from international financial markets, plus, perhaps, take legal action against their assets in other countries for violation of contract. 2) debt could be stretched out at lower rates but over longer time period which would make it easier to pay back in the short term because debt service obligations per year would be reduced but ultimately the total amount paid would be greater. some supported this to increase the likelihood of ultimate repayment and reduce recessionary impact of austerity measures and threats of default. 3) rollover the debt, i.e., borrow more money to pay off what is presently owed.

b) It was the last of these three that was generalized. With IMF & Fed as intermediaries, roll over deals were negotiated between creditors and debtors so the latter could borrow money from the former to pay the former under the condition of changing their economic policies to generate the foreign exchange necessary, e.g., devaluations to cut imports. These rollovers didn't resolve the problem quickly but only bought time to deal with the underlying problems of profitability and popular resistance. Moreover, that resistance was often so fierce as to lead debtor countries to be unable to meet their obligations under the negotiated agreements so that roll over loans were cut off and negotiations had to begin all over again in an oft repeated process of wrangling against the backdrop of mass resistance.

Part VI: The Peso Crisis
(Answer 1 of the following questions for 12 points.)

Political problems: Zapatista uprising plus a more general upsurge in popular demands for democracy including dramatic reform of political system of elections and parties; economic problems: neoliberal opening of Mexican economy (NAFTA + privatization, etc.) had drawn in more speculative than real investment, lots of hot money sensitive to changes in both economic and political climate. Governing party was spending massively to buy elections and fight back against opposition in mid 1994 elections, also using foreign exchange reserves to support peso in foreign exchange markets to the point where those reserves were dwindling in a manner that could not be sustained. Then president Salinas could have devalued the peso but didn't because he was fighting not only for power in Mexico but for his own prestige as the "modernizer" who had brought Mexico into the First World. He was angling, with US backing for the presidency of the World Trade Organization. So he ignored his own advisors who recommended devaluation of the peso and handed the problem over to his successor Ernesto Zedillo. Thus a social ferment which threatened the old structures of power, highly volatile financial markets and desperate struggles within the state to retain power --which included infighting between the reformers and the dinosaurs that seems to have involved assassination among other things. All this came to a head in December 1994 when the Zapatistas broke out of the Army encirclement and announced it to the world --thus undermining investor confidence in Mexican stability and precipitating a drastic devaluation of the peso and massive capital flight that threatened to bankrupt Mexico.

21. Discuss the Mexican and US governments' early 1995 responses to the Peso Crisis. Describe what was done, and why, and the ways in which those actions were complementary or contradictory-on both economic and political planes? Explain too the effects of the policies, on macroeconomic variables and on various groups of people.

Early responses were two-fold. First, a massive bailout package negotiated with the US heading one side that included the IMF, banks and the Bank of International Settlements and Mexico on the other, forced to make concessions to get access to some $50b to roll over its debt and stabilize its markets, concession such as 100% foreign ownership of Mexican assets, such as massive austerity for its people, such as putting up its oil reserves as collateral against the debt. Second, a huge military offensive involving over 50,000 troops against the Zapatista rebellion in Chiapas designed to crush it and the communities that had given it birth. The exposure of Riordan Roett's Chase Manhattan bank letter to emerging market investors made it seem like the military attack was also dictated from Wall Street if not Washington. The rationale was not to curb a military threat to the Mexican government but, as Roett explained, to bolster "investor confidence" that the Mexican government was in control of the country and keeping its grassroots movements under control. Roett even suggested the possibility of defrauding state elections to placate investors worried about stability. Thus we can see that the economic actions (repressive austerity, more foreign control) and the political actions (armed assault on peasant villages) were both designed to make sure that Mexico was a safe haven for foreign investors. The might be seen as contradictory however in as much as the military offensive (which failed in its declared objectives) itself demonstrated a lack of stability and the inability of the Mexican government to deal with indigenous unrest in creative ways. The mailed fist demonstrated that Mexico was NOT part of the First World but rather behaving like a good old Banana Republic. Repressive austerity also did nothing to convince the Mexican people that the promises of neoliberalism would be kept and thus perhaps stiffened their resistance and political opposition. The effects varied: for the people in the Zapatista communities they suffered violence and the hardships imposed by the army; for many workers who lost their jobs they faced poverty, for many small business people and farmers they faced the loss of their businesses, farms, houses, etc; for the speculators in Mexican capital markets who didn't immediately bail, they were protected, for the managers of those capital markets, they too were bailed out.

Extra Credit
(number of points depends on quality of answer)

With this equation we can estimate the impact of say a 10 percent devaluation on exports.