Political Science 369: Chapter #8

depreciation/ devaluation

Depreciation: is a measure of the amount of value an asset loses from influential factors affecting its market value. Devaluation: the deliberate downward adjustment in the official exchange rate, reduces the currency's value

currency exchange rates

When parties in one country want to buy goods or financial assets from another country, they have to convert their local currency into the currency of the sellers (affect the value of everything a nation buys or sells on international markets)

9) The policy of the U.S. Federal Reserve to increase the money supply by purchasing hundreds of billions of dollars in bonds and mortgage-backed securities is called a) quantitative easing. b) crony capitalism. c) a Ponzi scheme. d) the Dodd-Frank Act.

a) quantitative easing.

Briefly outline the main features of the Gold, Fixed-Exchange Rate, and Managed- Exchange Rate financial systems.

a. The main features of the gold standard are: i. It was a self regulating international monetary order rooted in classical liberal ideas and different currency values were pegged to the price of gold. ii. Another key feature was if a country experienced a balance of payments deficit it would be corrected nearly immediately following the deficit's onset. iii. Finally, the gold standard instated an international financial system that was equilibrating, stabilizing, and confidence building. b. The main features of the Fixed-exchange rate are: i. To start, the international monetary system that was more open to market forces but not entirely separated from political forces, and a key shift in doing so was setting an oz of gold at $35 through a fixed exchange rate system. This would cause other currencies to fluctuate in relation to this exchange rate. ii. Any currencies that went above band limits would cause central banks to buy up excess dollars or sell their own currency until the currency value moved back closer to par value which was geared at reestablishing supply and demand equilibrium. iii. Other aspects of the fixed-exchange rate were the establishment of capital controls within countries (which allowed them to regulate the amount of money entering/ leaving their country), nondiscrimination in the conversion of currency, and the usage of the US dollar as the main reserve currency. c. The main features of the Managed-Exchange rate system are as follows: i. The principal feature of the managed-exchange rate system was the IMF authorizing the widening of trading bands which made changes in currency values more susceptible to market forces. ii. Flexible exchange rates were also at the behest of the relaxation of capital controls and increasing global liquidity.

the fixed exchange rate system

also called a pegged exchange rate / type of exchange rate where a currency is fixed or pegged by a monetary authority against the value of another currency, a basket of currencies or another measure of value like gold

10) What is "bitter medicine"? a) The fees major banks have imposed on customers to bring down bank debt b) Another name for austerity policies in Europe c) The U.S. TARP program d) A drink in honor of all the working class and poor who lost out during the financial crisis

b) Another name for austerity policies in Europe

12) Which of the following statements about exchange rates is incorrect? a) Between 2008 and 2017, the euro appreciated against the U.S. dollar. b) Between 2000 and 2008, the U.S. dollar declined in value relative to the euro and renminbi. c) Between 2011 and 2017, the yen appreciated significantly against the U.S. dollar. d) After 2004, the Chinese government let the renminbi depreciate against the U.S. dollar.

b) Between 2000 and 2008, the U.S. dollar declined in value relative to the euro and renminbi.

reserve currency

foreign currency that is held in significant quantities by central banks as part of their foreign exchange reserves

1) Which of the following was not a characteristic of the fixed exchange rate system of the finance and monetary structure? a) The price of gold was fixed at $35 an ounce. b) The formal and informal rules of this system reflected a political bargain between theUnited States and Western Europe whereby the United States provided security toWestern Europe in exchange for its acceptance of U.S. hegemony. c) The IMF used a variety of borrowing measures to regulate currency value adjustments. d) Currency values were allowed to adjust up or down freely according to supply and demand conditions in the market for the U.S. dollar.

Currency values were allowed to adjust up or down according to the supply and demand conditions in the market for the U.S. dollar

toxic securities

A toxic asset is a financial asset that has fallen in value significantly and for which there is no longer a functioning market. Such assets cannot be sold at a price satisfactory to the holder.

Keynesian compromise

Allowed individual nation states to continue regulating domestic economic activities within their own geographic borders which included capital controls.

speculation

An investment in a foreign currency based on a belief that the currency will either appreciate or depreciate. Speculators have different ways of betting against a rise or decline in a currency; if they bet correctly, they can earn a profit by buying or selling the currency before and then after it changes in value. Currency speculation is common in foreign exchange markets, but at times it can precipitate a financial crisis in a country.

Appreciation/overvaluation

Appreciation: is an increase in the price or value of an asset. Appreciation occurs when the market value of an asset is higher than the price an investor paid for that asset. Overvaluation: A company is considered overvalued if it trades at a rate that is unjustifiably and significantly in excess of its peers.

capital controls

Are the residency-based measures such as transaction taxes, other limits or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account

hot money

Capital or investments that move from one country to another in search of short-term profits. Because hot money moves relatively quickly and frequently from one financial market to another, it can cause financial instability and significant changes in the value of some currencies.

quantitative easing

Central banks such as the U.S. Federal Reserve and the Bank of England engage in quantitative easing by electronically creating new money which is used to buy government bonds, mortgage securities, and other assets in the hopes of lowering interest rates so that private companies make new investments and private banks make more loans. The Federal Reserve engaged in three rounds of QE between 2008 and 2014.

the gold standard

Ingrained in the Pax Brittanica time period. From the end of the nineteenth century until the end of WWI. This system linked currencies to gold and it was a self-regulating system. If there were balance of payment deficits it was automatically accounted for and corrected. It had a stablilizing, equaliberating and confidence-building effect.

Explain what specific political and economic factors have contributed to the United States' huge current account deficit. Who does this deficit help and hurt? Discuss how this deficit can in the near future impact other countries' willingness to invest money in U.S. Treasuries (i.e. loan to the U.S. government). Discuss the extent to which this deficit undermines U.S. hegemony and system stability.

Potential economic factors that have contributed to the United States' huge current account deficit are the weak regulation of the major banks, a continued rise in the U.S debt-to-GDP ratio (it has risen steadily from 54 percent in 2001 to 103 percent in 2017), and a substantial weakening of the dollar due to U.S. tax cuts and increases in government spending. This deficit helps China and hurts the U.S. in that confidence in the U.S. dollar has waned in comparison to the renminbi. U.S. hegemony is undermined by the fact that the U.S. needs other countries to help finance its deficits, which para-stands to further undermine U.S. authority and financial leadership. Many officials and experts are concerned that U.S. president Trump's isolationist and nationalist policies could cause the postwar order to break down. Without more statesmanship and multilateralism on the U.S. president's part, markets may lose trust in the United States, causing greater instability in the global financial system.

the balance of payments

The balance of payments of a country is the difference between all money flowing into the country in a particular period of time and the outflow of money to the rest of the world

How likely is China to be the next hegemon of the global financial system? What does it have in its favor and what obstacles stand in its way?

The degree to which China is likely to be the next hegemon of the global financial system is largely dependent on the likelihood of future international financial shocks and United States financial policy. Kirshner has argued that the global financial crisis delegitimize the liberal international financial order which has generated a new heterogeneity of thinking outside the US regarding how to manage global financial affairs (435). Moreover, as the USD has lost global importance over the years president Xi of China has internationalized the Renminbi including it in the SDRs of the IMF demonstrating the possibility of China's future likelihood as a hegemon of the global financial system. However, the USD is still set to maintain its global importance for years to come with the euro in 2nd place and still being far behind. Moreover, with China lacking state craft elements to manage the Yuan's internationalization alongside the reluctance to make financial and political reforms Eichengreen predicts it will take a generation prior to Renminbi overtaking the dollar's role internationally.

subprime mortgage loans

a loan that is meant to be offered to prospective borrowers with impaired credit records. The higher interest rate is intended to compensate the lender for accepting the greater risk in lending to such borrowers.

8) A toxic security is another name for a) bank mortgages and investments that lost a good deal of their value during the global financial crisis. b) credit default swaps. c) the U.S. version of SWFs. d) a new drink in honor of all the CEOs of major businesses who lost their jobs during the financial crisis.

a) bank mortgages and investments that lost a good deal of their value during the global financial crisis.

5) Which term refers to a process in which investors quickly shift their funds out of a nation in search of a "safe harbor" for their investments? a) capital flight b) a balance of payments crisis c) a speculative attack on a currency d) a panic attack

a) capital flight

2) Which leader complained that by holding (unofficially) weak U.S. dollars, his country was helping pay for the unpopular Vietnam War? a) Harold Wilson of Great Britain b) Mao Zedong of China c) Charles de Gaulle of France d) Lester Pearson of Canada

c) Charles de Gaulle of France

7) Which of the following statements about the financial crisis from 2007 to 2009 is incorrect? a) The U.S. Federal Reserve played the role of "lender of last resort." b) The Federal Reserve rescued AIG, one of the world's largest bank insurers. c) Under Obama, the U.S. Congress passed a $2 trillion stimulus spending package. d) The U.S. temporary government gained majority ownership of General Motors (GM) and Chrysler.

c) Under Obama, the U.S. Congress passed a $2 trillion stimulus spending package.

4) Which indicator is most important when it comes to determining the balance of payments and whether or not a nation is going into debt? a) the balance of trade b) the capital account c) the current account d) none of the above

c) the current account

6) This event signaled the beginning of the Asian financial crisis in July of 1997: a) when foreign investors pulled most of their fund out of South Korea b) when the Thai government was overthrown in a military coup c) when the Thai government could no longer support the 25 to 1 value of the Thai baht to the U.S. dollar d) when the IMF signaled that Thailand's government was no longer worthy of credit

c) when the Thai government could no longer support the 25 to 1 value of the Thai baht tothe U.S. dollar

11) Which of the following did the Dodd-Frank Act require? a) Prosecution of Wall Street insiders b) Modification of mortgages for struggling homeowners. c) Tighter limits on bank executives' pay and bonuses in exchange for government bailouts of banks d) Banks' holding of more capital and collateral in reserve

d) Banks' holding of more capital and collateral in reserve

3) Since 1944, the role of the IMF in the monetary and finance structure has been a) to increase the amount of liquidity in the international financial system. b) to ensure a stable international monetary system. c) to help countries with balance of payments problems on a short-term basis. d) all of the above.

d) all of the above.

the flexible exchange rate system

is a monetary system that allows the exchange rate to be determined by supply and demand.