PS 124 [Post Midterm] Final Review

Fiscal policy

refers to taxing and spending Fiscal expansion is when you increase spending and decrease taxes to boost the economy but can have effect of inflation-- and lead to high unemployment

Problems of EU

- trade off between sovereignty and international law - states have different preferences - still the issue the most powerful states are the only voices being heard * go over Brexit* should not be 'one size fits all' kind of policy in the economic and monetary union (EMU)

Regional Organizations

*an RTA is a type of PTA* A region is typically defines as a geographically specifed area, so its usually a group of countries located in the same geographically spedicifed area (but the notion of region is vague so may not actually apply geographically) ROs are created to advance a set of common goals needing to be done through a small grouping of states, provide a collective good, symbolic reasons, reduce transactions costs, or be a platform for baragaining/negotiating Ex: EU, NATO, NAFTA, etc. ROs can be bonded under similar exporter products/markets, reglious, linguistic, or political similarity Ros are more likely to be successful when the group is small, information is readily available, partners have a history of interaction, and where trade policy can be linked to other economic or noneconomic relations (concessions)- Lake Reading RTA or regional trade agreement is made between 3 or more countries to lower trade barriers i.e NAFTA

Section VI: Other organizations:

- AIIB - TPP/ RCEP

Bank's impact on the environment

- Direct positive impact: a project designed that specifically addressed major environmental issues ex: projects to increase energy efficiency or conservation, sewage treatment, improve land management etc. or the lighting project in Mexico - Direct negative impact: a project that causes environmental degradation [doesn't include something like a mass transit system] - Indirect positive impact: research or advice the bank gives that contributed to change in government policy toward the environment ex: agenda setting exercises that shift a country's environmental priorities - Indirect negative impact: lending for macroeconomic policy change that reduces gov. spending for the environment

Levels of integration

- Free trade agreement: eliminates tariffs and other trade restrictions -Customs Unions: FTA but common external tariffs -Common markets: customs union plus mobility of labor and capital - Economic union: common market plus common industrial, fiscal, monetary policies - Political Union: economic union plus common foreign/defense policies

Two principles of the GATT

- Most favored nation: if one nation grants a trade advantage to one member state, it has to grant the same advantage to all other GATT members. Must treat all countries within GATT equally. - Non-discrimination(also called national treatment): have to treat outside, foreign products the same as internal, domestic ones

Trade: protectionism v. globalization

- Protections argue for limits to trade/trade-barrier (which states can do through tariff: tax on imports that increase the price of the good abroad and produce domestic producers, quotas: barrier or quantitive limit on how much you can import of a good, and subsidies: give a tax break or fund producers) -Globalization *promotion of open trade/markets, free trade is also representative of the liberal perspective in economics Tariffs in one country led to retaliatory tariffs so IOs attempt to deter this and foster globalization such as NAFTA --> more intertwined markets are/growth of trade between countries the greater the bargaining range and the less likelihood of war Trade more likely if countries are close geographically/ politically (allies) narrowly based social groups and political institutions are more likely to favor trade protection

How did the EU then respond the Debt crisis

- Reform in return for financial assassitance -"Troika" {IMF, European Commission and European Central Bank) designed programs: required countries to surrender large amounts of economic sovereignty to their partners in return for assistance [essentially loans have conditions] [ as broken down in Stiglitz reading] 1. Austerity: refers to cutbacks in expenditure intended to increase confidence through a balanced budget (lower the deficit)-- only possibly if wages fall in order to do this the gov. needs to increase the labor pool they can either cut spending or raise taxes 2. Structural Reforms (SAPs): changed to the economic and legal "rules of the game ex: unemployment benefits (decreased) or labor markets shift to make it easier to fire/hire someone Since they couldn't lower exchange rates both measures are trying to lower wages and prices Ultimately power (like Germany) still controls which policies are enacted -- not truly neutral Whats left? It still has not been resolved *euro zone could break up between North/South, national currencies, institutional reforms of a banking union or allow for automatic transfers, flexible currency etc.

Problems of GATT:

- Weak dispute settlement mechanism: an accused country could not be forced to comply with a ruling, members exposed of using loopholes further hurt the GATT credibility to actually place rules on its members - Loopholes: regional trade agreements such as NAFTA or national security means (allowed in Article XXI protectionist measures and article XXIV PTAS allowed)-- article XX also allows for protectionist measure if their for human rights or health of plant/animal life etc.

Critiques of IMF

- didn't prevent the 2008 financial crisis - call for quota reform to provide emerging economies with larger quotas as they need it more -- also gives countries with larger quotas more vote - increases poverty and pollution *anti-globalization protest* - the IMF truly came under attack after the 1990s Asia crisis as it failed it mission of global stability- did not prevent the crisis and policies were seen as wrong-headed -Conditionality could be too intrusive or not geared toward the specific area - Moral hazard: when insurance against bad outcomes encourages moe risky behavior

Critiques of the bank

- environmental lending has not been a clear upward trend - still inconsistency between rhetoric and action - bank has been overoptimistic - environmental issues are still not mainstream - overal unevenness of actor

why don't states always support trade organizations? [ TG and Lake reading]

- sovereignty - development - labor - security - social welfare - environment Domestic pressures matter: need to look at the interest in question, the institutions that express these interests, and how contending interest interact with one another -- trade barriers, make imports more expensive, increasing the purchase of the good domestically increasing prices, which can then lead to raise in wages, hiring of more workers etc. but this mostly hurts the consumer who now has to pay more while producers can (redistributive effect) International trade also falls victim to the classic prisoner's dilemma (defect even though both would be better off if they cooperated)

Economy of 1970s/ 1980s/ 1990s

-1970s: End of Gold Standards[ system where most of industralized at time promised to exchange its currency for gold, at a set price] as there was more dollars in circulation than gold -- oil shocks of 1973/1979 lead to expansionary fiscal and monetary policy which further increased inflation --> unemployment also was high *high unemployment + inflation=stagflation - Basically 1970s charatcerized by the closing of the gold window and 1973 oil shocks but IMF was able to maintain itself and increase some lending for a short period of time - 1980: characterized by the Latin America debt crisis- the gulf states had too much money so they put it in a bank but this led the banks to pay interest and loan that money out certain latin american countries like Mexico need the money BUT then Mexico declares it cannot pay back its loans in 1982 with led other Latin American countries to declare the same caused hyperinflation and massive unemployment--> becomes known as Lost Decade *1982 Debt crisis* - IMF stepped in as a coordinator -1990: East Asia focused with Hot money flowing into the economy led to countries beginning with Thailand and spreadint to Russia and Brazil to run a large current account deficit but they exchange rate is fixed so the only option is for the government to use its reserves --> countries current float or devalue [1997-1998] IMF bailed out both Latin America and East Asia

Main institution within the EU:

1. European commission:executive body of EU, manages and implements policies and represent the interest of the EU as a whole, and represents the EU internationally *i.e. trade treaties 2. Council of European Union: primary decision making body, passes EU laws, proposes budgets, foreign/defense policies and refugee/asylum policy 3. European parliament: represents the citizens of the EU, elects offices, debates and passes EU law [not the European council] 4. The Court of Justice: settles disputes between states, interprets the provisions of the EU treaties and community decisions --> power has enhanced with its provisions ruling over national ones 5. European Central bank: created in the Treaty of Amsterdam, it is in control of the monetary policy within the eurozone (not every EU member uses the euro) -- maintain price stability and keep inflation low there is also the European investment Bank which gets little focus

Section I: Economic crisis

A series of Boom and bust usually caused by a exogenous shock that leads to a bubble as it makes a certain sector of the economy look good Boom=expansion of credit aka Loans in the booming sector become easier to get, everyone wants to get on board, and they create a bubble and the fears of such a bubble are downplayed A bubble cannot last forever as in its very meaning the price raise is unsustainable so when people begin to sell others panic *chain reaction* A boom and a crash can be based on expectations (herd mentality) A crash occurs when the demand side shocks from indebtedness and economy begins to slump *paradox of theft* = if everyone starts saving total debt loads increase

Bank's environmental history

1970 under President McNamara began the bank's first attempts to address the environment --> most superficial with environmental activists groups rising in the 1980s to criticize the bank's projects impact on the environment 1987-1990s saw Bank reform to address organizational structure and environmental approach --> made progress in certain aspects but also took on new heat for being contradictory as it continued projects that had a direct impact on the environment *sardar sarovar dam* 1990s: how does it all add up? plans remain broad and continue to leave one questioning the bank's progress

2008 Financial Crisis

A financial crisis that went from a borrowing binge to a complete collapse- America was not alone- England and Ireland quickly followed with a bubble of their own and it continued to spread globally *Menzie reading* Causes: -The housing bubble w/ investors moving into the housing sector and then all pulling out at the same time for fear of losing their money *bursting the bubble* - The East Asian countries recovering from their own crises by increasing their savings *saving glut* - Money flowing into the country increases exchange rates so imports increase but exports decrease - Moral hazard in housing - They misestimated the risks: foreign capital, death spiral, *come back to* The Build up: there are different interest at play between non-traceable sector (housing, infrastructure, real estate) benefits from capital flow while tradable sector (manufacturing) becomes weaker. Financial innovation increases, like Triple A loans, occurs as credit expands Overall the massive inflow of funds, the bloated financial sector, surging imports, orgy of consumption and the bubble of the housing matter led to the eventual debt crisis

Benefits of ROs v. Costs

Benefits: ROs can complement IOs, be a stepping stone toward global governance, be trade creating, lighten the burden of the security council/UN and can typically do things quicker and easier then an IO who has great limitations, helps regional powers that feel under represented in global orgs. have more of a voice, allows states to be more competitive, less actors involved, Costs: Forum shopping, creating alternative rules/mandates *hodgepodge of rules*, can be a trade hindrance by hurting those not involved (limiting trade with nonmembers), undermine most favored nation concept of the WTO ROs can also be biased, corrupt, lack experience or capacity, can be too bureaucratic, unhelpful, and usually lack legitimacy or they may draw legitimacy away from IOs

Boom *for clarity* 2008 crisis

Borrowing from abroad--> capital flows in--> increase ability to buy Leads to surge of imports= surge in prices in housing, food, medical care, and other services Other causes of boom: Menzie reading - low taxes gave people more money to spend, borrowing increased giving more money to individuals, and deficit allowed gov. to increase military spending - lenders abroad were also supply the U.S. government by buying treasury securities - instead of corporations being the same borrower it was not the federal government and households [this should of raised IMF red flags and didn't *Menzie reading* Boom raises the costs of tradeables (things that can be traded between borders) but non-tradables go down (things that have to be consumed where produced) Dollar value rises increasing imports hurting local producers, trade deficit grows *special interest can be at play in a boom becoming politicized*--> Menzie reading addressing the influence of realtor/mortgage companies on re-election especially toward Republicans and a gov. unwilling to look like a bad guy 'take the punch bowl away'- and the idea of 'were different' and 'recession now v. recession later' kept the bubble going

Section III: Trade

CA is the core of free trade

Drezner reading: The system worked * does this form of global governance work*

Drezner breaks down the main ways global governance is said to be helpful: - focal points in coordinating policy and more cooperative outcomes - reassurance: show that a particular country is making moves - monitoring and enforcement - showing a normative desire to comply - be a provision of expertise - ameliorate domestic political pressures Many argue global governance failed in the 2008 crisis: seen in the collapse of the Doha round and rise of protectionism, euro crisis, breakdown of macroeconomic policy and the failure of climate change negotiations However Drezner essentially argues that if you compare the great recession of 2008 with the most recent economic crisis of its magnitude the Great Depression the 2008 financial crisis was actually successful in global governance: cross-border flows did not dry up, did not lead to detonation in international security, G20 was far more representative and inclusive then the G8 and represented 85% of the world's economic output working together, IMF implemented quota reform and World Bank reallocated voting power

How can the government respond to an economic crisis

Either in monetary (raise interest rates) or fiscal policy Fiscal policy can make up for drops in aggregate demand but both policies have limit due to expectations Government can begin countercyclical spending Theories: -Neorealist believe actors can efficiently respond to shocks - Fully rational expectations Governments should stay out of the economy? Note: one of the reason the gov. didnt respond to the crisis was both political and due to other factors (such as moral hazard (financiers have no incentive to solve their problems if they are bailed out) and Lehaman brother's remaining adamant for a fed bail out that didn't come

Paris Agreement

Established in the United nations Framework convention of climate change to reduce carbon emissions by 2020 (size of cuts varied per state but the problem was developing world had already polluted itself to development now were stopping the developing world)

Two types of exchange rates:

Exchange rate: the value or price of one currency expressed in another [ stable exchange rate are necessary for credible investments] beggar-thy-neighbor mentality was the norm- if Country A lowered the value of its currency relative to anothers, it makes their products cheaper, increaisng their exports- so country B could repsond by doing the same thing leading to a vicious circle *competitive devaluation* Fixed exchange rate: government commits to keeping the exchange rate to a specific value Floating exchange rate: price is determined by the supply and demand on the open market If the dollar becomes worth less abroad it depreciates (exporters benefit from depreciation but consumers benefit from appreciation)--> we don't want to buy something if it cost us double* Exchange rates were originally pegged to the gold standard as that is what currency was convertible to BUT this broke down during the great depression (pre WWI) --> becomes difficult to balance of payments when currency is begged as it can only be adjust through internal devaluation

2008 Financial Crisis Bust

First to hit was the mortgage sector- based on mis-estimated risk and bad expectations all of which the financial system had based itself on The complexity of the loans made transparency limited and borrowers generally didn't know who to blame or where to pull out from

Theories of Trade: that show the problem of trade [ also broken down in the Lake world politics reading]

Heckscher-Ohlin model Stophler-Samuelson model Ricardo Viner model These theory essentially try to explain/predict trade preferences and to understand which actors will be expected to support or oppose trade protection

GATT

General Agreement on tariffs and trade: birthed out of the collapse of the global economy following WWII, GATT was one of the Bretton Wood institutions (World Bank and IMF) tasked to increase liberalization by removing tariffs (taxes on imports) and prompting open nondiscriminatory trade. Established in 1947 w/ 23 countries involved including the U.S. (essentially as they were not involved in the predecessor ITO, international trade organization) Tariffs led to a 'beggar-thy-neighbor' mentality or retaliatory actions *seen under the Smoot-Hawley Tariff of 1930 GATT didn't get rid of all tariffs but instead insured they were fairly distributed and is complicated by dumping (choosing to sell below costs) GATT operates through trade rounds or meetings to bring about more trade Goal is slowly keep moving forward with liberalization GATT was a provisional agreement so neither a treaty or formal organization

Rounds of the GATT

Geneva/ Kennedy round: decrease average tariffs by 1/5 and then 1/3 Tokyo round: dealt with non-tariff barriers [government subsidies, anti-dumping duties, rules/laws that were actually discriminatory but hidden under environmental measures etc.] Uruguay Round: 1986, goals included: lowering tariff and non-tariff barriers to trade, intellectual property, and agriculture - ended in 1999 with 109 countries agreeing to lower tariffs by 40% and established the WTO Doha round began in 2001 and known as the 'development round'-- suppose to be focused on handling developing needs but is presently stalled or simply dead. Made up of 157 countries makes a consensus or single undertaking very difficult ('nothing is agreed till everything is agreed'), there was different needs between developed and developing world and new growth of powers like India, China, and Brazil played a role-- Major disputes lied in agriculture liberalization (political disagreements) failure led to more protectionism, rise of Preferential Trade Agreements or trade agreements between 2 or more countries and has created a web of agreements -- issue still include regionalism, poverty reduction and agriculture

Richardo- Viner

Groups are separated between exporters (favor trade) and import-substitiues (oppose trade) this is the specific factor model : labor/capital within specific industries likely share interests The difference between S-S model is that this model acknowledges that some factors of production ties to an industry are specific to that interest -- the steel company isn't concerned with capital as a whole but rather the interests of the steel industry -- people's interest are thus ties to interests of others in their sector

Heckshcher- Ohlin Model/Stopler- Samuelson

H-O model looks at factors of endowments (these are the materials and human resources a country possesses] determine CA and what countries produce and export. Argues countries will exports good it has abundant endowments and import those that are scarce] so labor can move freely between industries with high labor mobility this explains reality but with low mobility R-V is a better model S-S model grew out of the H-O approach that looks at factors of abundance and factors of scarcity to argues that those in abundance or who own the factor of production that is abundance have a CA in production -- so they benefit from trade while those individuals in scarcity are hurt DUE to wages and prices scarcity can be produced for cheaper abroad (when something is scares its more expensive) So S-S theorem predicts hat trade protection benefits the scarce factor of production-- is based on very broad groups of production (laborers, investors, and farmers) Tweak endowments to differentiate between skilled and unskilled labor [skilled is abundant in developed world while unskilled is scarce] so immigration is good *Wages fall* ex: U.S. unskilled labor scare but capital abundant protection efforts protect scare-production based on unskilled labor which will in turn raise the american demand for unskilled labor and helped those workers

How the IMF responded to the 2008 crisis

IMF unable to anticipate the crisis and was woefully unprepared but markets were able to remain open and responsive once crisis it: loans were activated, new short-term lending family created, loans became available within 48-72 hours of reaching an agreements and billions of dollars were loaned out - tried fiscal and monetary stimulus plan - created a more flexible credit line which would allow even countries with strong policies to receive loans without conditionality Initiated the G20 summit to get states to commit to stimulus plan and not incentive to deter - agreed to triple IMF resources, currency swaps between countries - November of 2008 met at President Bush's initiative- EU also joined - increase voice of low income countries on the IMF board and reform how a leader in appointed BUT the FED was in control of the monetary policy and a lot of IMF reform was ambiguous and the U.S. began to block IMF quotas and governance reforms in 2010--> in ability to pass these reforms has led China and the other BRIC countries to set up new organizations IMF has two types of surveillance: multilateral which focuses on stability of global economy and bilateral which addresses individual member

Benefits of WTO

Lake reading - facilitates standard of behavior, verifies compliance, eases joint decision making, and resolves disputes - also provides a greater amount of transparency in information on trade and trade policies and can monitory countries as they must report to the WTO and rules by the dispute body are binding

Absolute v. Comparative advantage [ Lake Reading]

Mercantilism believe there is a finite supply of goods and that an individuals gain is then another's lost- trade should then exist based on absolute advantage [the ability of an individual to produce a quantity of a good for less of a costs then its competitors, so compared to anther country] so if an individual has absolute advantage in everything they should be self sufficient. Mercantilism believes in trade barriers as economy is subordinate to national security- exports > imports. Also based on import-substitution industrialization which reduces dependence on industrialized economies by encouraging domestic production of manufactured goods [used in developing countries as they try to increase trade barriers to help create more jobs at home *but there is also creative destruction in trade] BUT there are opportunity costs (things you give up) with being self sufficient thus both parities (even the one with an absolute advantage) benefit from trade (even if country A produces everything less efficiently than B) and they should just specialize in the one they have a comparative advantage in (the good they produce with the least costs or the most cost-effective compared to other goods WITHIN the country)-- this is the basis of the liberal perspective on the economy

Transpacific Partnership (TPP) v. Regional comprehensive economic partnership (RCEP)

TPP is a free trade agreement among 12 pacific rim economies, pioneered by America this agreement isolates China -- seen as part of Obama's pivot toward Asia it was concerned with open trade along with intellectual property, labor standards, and environmental protection [ given the last U.S. election this is unlikely to pass] RCEP has some of the same countries as TPP but excludes the U.S. [china's counter to the TPP] is focused mainly on tariff reduction so fewer agreements outside of that as the TPP-- Latin American countries signaled interests which would be a direct hit to the Monroe doctrine keeping outside powers out of the Western Hemphishere

Stiglitz reading

The problem of the euro crisis stems from the creation of a single currency, the euro, itself and the failure to create institutions that enable Europe to function effectively under a single currency Eurozone's focus on a fixed exchange rate, focusing purely on inflation, and when the crisis hit they focused on austerity measures and reforms within the country- when they should have focused one restructuring the EU itself -- still dominate by market fundamentalist that believe if the government account for inflation then the market would ensure growth and prosperity *not the case* -- TINA (there is no alternative) Argues the euro has failed both in economic performance and political integration Overall this is a pessimistic outlook on the euro and the impending crisis and shows the faults of the euro system, its response to the financial crisis and the need to understand the euro was a means to an end and not an ends itself so something needs to be changed...

World Bank

The main goal of the World Bank was to promote economic development by providing large infrastructure development [i.e. dams, roads, power plans etc] BUT industrialization often comes with pollution For a long time this was seen as a rich country problem Promoted sustainable development: the idea that economic activity meets the needs of the present w/o compromising the ability of future generations to meet their own needs Thus World Bank has some goals like financing/loans for more efficient technology or project to replace other polluters and loan for environmental management True environmental initiative did not begin till 1970s with McNamara

3 main problems of the euro zone which may had led to the crisis

[ all 3 are present in the dollar system and is why the system works-- you would never even think of getting rid of the dollar] 1. Automatic transfer: something we don't even notice, is when revenue from one state automatically goes to another- the euro zone is a monetary union with a weak fiscal policy -- European states do not want to help others due to sovereignty, nationalism, etc. EU budget is also low only 1% of GDP 2. Deficit and debt limits: or balanced budgets, deficit is overspending annually while debt is the total deficit. The deficit should not go over 3% and debt 60%- however both France and Germany have gone over and there is nothing the EU could do *makes this limit look weak* 3. No federal bailouts: in Europe this was seen as cheap talk, as when the crisis hit the EU bailed out countries Other problems include: fixed exchange rate- so countries cant change the value of their currency- and asymmetric shocks Both do not solve the problem that countries have different preferences and may need to somehow increasing price/wages

Euro-zone crisis

also known as the European debt crisis erupted in 2010 stemming out of the 2008 Financial crisis Caused by bonds in the euro zone converging, countries borrowing as much as they could due to low bond prices, countries were unable to pay back their loans and the markets crashed Problem both economically but also greatly political (not every country necessarily had debt) Greece was the center of the crisis and the Troika bailout in 2010

International Trade

buying and selling of goods and services across national borders *has become essential for economic growth and is a root of the concept of globalization (integrated economy) still based on the theory that a country should produce the good they have a comparative advantage in creates winners and losers -- linked to geopolitics

Monetary Policy

control of the money supply in terms of interest rates Monetary expansions refers to increase money supply which will inturn decreasing interest rates

AIIB

is a multilateral development institution for infrastructure projects in Asia [ discussed in the Lipscy reading] First proposed by China in 2013, despite Germany, UK, and Australia taking part in it was seen as a threat and a way to undermine America and western influence [ undermine credibility of IMF and World Bank] and two fear China's intentions -- However, Lipscy argues undermining existing institutions is not in China's best interest it gives them legitimacy and a powerful position as a state quo power, If China over dominate shareholders/members can move else where and due to so many other organizations if China truly wanted to exert its influence it be better off in bilateral ail or overseas activities -- basically this reading argues China under the AIIB is not a threat and the U.S. should support china increasing multilateral agreements (instead of increasing its air carriers) -- institutions are not a zero-sum game, China cannot just operate freely just like the U.S. can't

Taylor Rule

is a policy rule that stipulates how much the central bank should adjust interest rates when there is a change in the inflation rate and the rate of economic growth *not maintained in the 2008 Financial Crisis as integrate was below the inflation rate* interest rates too high can can slow economic growth but interest rates too low can lead to excessive borrowing and inflation [Keep FFR higher than inflation] --> when interest rate becomes less then inflation this is called a negative real i.r. and lenders are basically giving money away giving people a large incentive to buy it Why did Alan Greenspan not follow the taylor rule-- may have been political *wanted to maintain position under Bush*

European Union

is a political-economic union made up of 28 states that accept free market economies and democratic principles and operates through 7 institutions - it is the largest world trader made up of 503 million people with huge economic potential - it constitutes a single market for good, services, and even people beginning post WWII and founded in 1951 with the ECSC(European coal and steel community, made up of France, West Germany, Italy, Belgium, Netherland, and Luxembourg *Schumam plan*) created to foster a process of integration and to solve security problem post WWs and Cold War- in the ECSC it was to reduce barriers to trading coal and steal 1957 Treaty of Rome: Created European Economic community and established a common market that eventually led to the EU 1992 Maastricht Treat added foreign and defense policy and economic/monetary union under the Euro and formally established the EU as the umbrella for the three commissions (ECSC, EEC- common market) ,European atomic energy commission) 2007 Lisbon treaty established EU as we know it today, adding the European Central Bank and European Council)

Washington Consensus

is a set of 10 economic policy prescriptions considered to make up the 'standard reform package'--> came about after Latin America and East Asia required Loans which had conditionality the consensus called fro deregulation, privatization, trade and capital liberalization and reduce subsidies to decrease deficits Arguably a cookie cutter approach- where countries make reform only where necessary

Federal reserve

is the central banking system of the United States that can also play a role in an economic crisis both in the U.S. and globally (by responding to U.S. crises) The FED controls the federal funds rate which is the amount banks charge each other for money --> when banks pay less or more for their money they charge interest rates accordingly thus FFR does impact individuals When the Federal Funds Rate is high spending is low as interest rates are high and discourages spending When the federal funds rate is low spending is high Leading up the 2008 crisis FED drove interest rates low encouraging borrowing

Balance of payment problem

is when you are looking at a set of payments and reciepts in relation to the rest of the world [broader then just trade balance] One such measure is also known as a trade deficit or when a country's imports (buying more) are greater then its exports (selling less) so the central bank is lacking hard currency IMF was meant to offset temporary balance of payments imbalances with loans which would in turn deter readjusting exchange rates BUT conditionality is attached to it--> meaning policy changes *the IMF deems necessary* had to be made so the loans must be used effectively to repay itself and make funds available to other countries they try to use reservers to keep ER fixed but reserves are limited (run on currency) hence why loans became necessary

Volker shock

occurred later 1970s continued to 1980s increased interest rates from 10-15% and then to 20% caused two recessions took till the late 1980s for economy to rebound

IMF

or the international monetary fund born out of the Bretton Woods institutions was made to help manage the international monetary system (make a stable economy and maintain stability by providing loads for macroeconomic stabilization) IMF is based on balancing exchange rates and the 'doctor-patient' relationship meaning the IMF treats ailing countries w/ bitter medicine i.e. loans w/ negotiations for a program that requires economic policy change - also provides liquidity to cover short term debts there are 188 members each assigned a quota where they can draw up to 300% of their quota (this how much a country contribute of their own currency and gold to the IMF). The country can pays at least 75% of its loan in its own currency (leading to IMF basket of currencies) *developed economies have larger quotas* IMF meant to create a more flexible system then the gold standard where currencies were fixed to the dollar and dollars were fixed to gold (till 1970s)

World Trade organization

successor to the GATT, main task to balance trade (referring to exports minus imports) and continue the expansion of an open international market, produced out of the Uruguay Round of the GATT was created to fix some of the failures in GATT such as having a more effective dispute settlement body [quasi-court that can make judgments to force countries to change domestic laws) in 1995. Created to administer the GATT and be a more structure, formal organizations Today it has 161 members. This is a member-driven organization with an emphasis on trade negotiations between government and decisions are made through a consensus (rules adopted unless a consensus says otherwise). Larger trading members still have more weight than smaller ones so winners can punish losers-- despite a one country one vote rule *stronger countries have moe leverage through forum shopping* Downsides: no police- one state must accuse another, and small countries can still be too small to hurt someone who is cheating, countries can also pay each other off aka settle disputes themselves Dispute settlement body is made up of a panel of 3-5 trade experts to discuss issue at hand and takes a while to make a ruling with the issue usually being resolved before it down -- there is an appellate body made up of 7 member groups which can appeal a decision Still up to the state to enforce ruling and make retaliatory trade BUT this body's rulings are compulsory and binding so they infringe upon state sovereignty WTO still has to counter rise of regionalism, agriculture issues, and poverty reduction

Global Financial Crisis

the effect of the U.S. housing boom ( housing prices went up while easy to obtain mortgages increased and low interest rates made investors more comfortable with taking a risk in borrowing), combined with saving, led to the build up and the eventual boom The fall came in Sept. 2008 after the U.S. gov. bailed out two of the largest mortgage financiers Fannie Mae and Freddy Mac - a week later Lehman brothers one of the older and largest investment banks collapsed as the U.S. gov. decided not to step in this time Triggered by the collapse of Lehman brothers in U.S. capital flows dried up, trade contracted and unemployment rose, U.S. and then the world fell into a great recession Crisis became a major test of the IMFs importance and breathed new life into the institution w/ the G20 summit quickly responding -- becoming part of the Troika to respond to the crisis in Europe

Section II: Environment

the environment is a collective good leading to the tragedy of the commons (there is no incentive for one individual to bare the burden of maintaining said good either by limiting use or other means so they overuse the common pool resource) There are also externalities that are not thought of by polluters, that cross borders, environment is also a consumptive good, a supplier of resources etc. How to solve the problems of the environment: - lassies fair - national regulation - international regimes Earth Summit 1992 raised global consciousness about the relation between the environment and development [however even this conference ran into the same problem that plagues any common good concerned about the costs of making additional commitment to the environment ]--> led to the millennium summit *MDGs*

Phillips Curve

the relationship between unemployment and inflation As unemployment increases inflation decrease When unemployment is low inflation is high (higher wages=higher prices= high inflation)

Climate change

world is getting warmer--> took precedent at the Paris conference in 2015 - The next front on climate change--> there is more to it then just limiting greenhouse gases and we have the tools possible to cut emissions -- this reading looks at the effects aerosols have not just on temperature but also the water cycle and their new predominance in East Asia and South Asia aerosols need to be cut in electric power generation (stop coal burning), transportation (cleaner fuel and combustion technologies), and household energy services (stop burning dirty fuels) gov. should raise concern and need to against aerosols (more so then gas) as well as vocalize their action