CHAPTER 10-19 ECN 2020 FINAL EXAM

How Tariffs and Quotas Work

Both tariffs and quotas normally have the effect of raising the price in the importing country, reducing the price in the exporting country, and reducing the quantity of imports. Any restriction of imports that is accomplished by a quota normally can also be accomplished by a tariff.

Open-Market Operations

the Fed's purchase or sale of government securities through transactions in the open market.

Balance of Payments Surplus

the amount by which the quantity demanded of a country's currency (per year) exceeds the quantity supplied.

Balance of Payments Deficit

the amount by which the quantity supplied of a country's currency (per year) exceeds the quantity demanded.

Central Bank Independence

the central bank's ability to make decisions without political interference.

Discount Rate

the interest rate the Fed charges on loans that it makes to banks.

Federal Funds Rate

the interest rates that banks pay and receive when they borrow reserves from one another.

Exchange Rate

the price in terms of one currency at which another currency can be bought.

International and intranational trade are similar in many respects. We study international trade separately because:

1. Countries are governed by separate governments. 2. International trade involves the exchange of national currencies. 3. Labor and capital are less mobile internationally than they typically are within a country.

Major Ideas

1. Countries trade because differences in their natural resources and other inputs create discrepancies in the efficiency with which they can produce different goods, and because specialization may offer them greater economies of large-scale production. 2. Two countries will gain from trade with one another if each exports goods in which it has a comparative advantage. Even a country that is inefficient across the board will benefit by exporting the goods in whose production it is least inefficient. 3. When countries specialize and trade, each can enjoy consumption possibilities that exceed its production possibilities. 4. Restrictions on trade generally raise the prices of goods for the importing country. 5. The "cheap foreign labor" argument ignores the principle of comparative advantage, which shows that real wages (which determine living standards) can rise in both importing and exporting countries as a result of specialization. 6. Tariffs and quotas aim to protect a country's industries from foreign competition. Such protection may sometimes be advantageous to that country, but not if foreign countries adopt tariffs and quotas of their own in retaliation. 7. Although the same trade restrictions can be accomplished by either a tariff or a quota, tariffs offer at least two advantages to the country that imposes them: Some of the gains go to the government rather than to foreign producers, and they provide greater incentive for efficient production. 8. Several arguments for protectionism can, under the right circumstances, have validity. These include the national defense argument, the infant-industry argument, and the use of trade restrictions for strategic purposes. But each of these arguments is frequently abused. 9. Most arguments for protection are shortsighted, or are made on behalf of special interests to the detriment of the general interest. 10. Dumping will hurt certain domestic producers, but it always benefits domestic consumers.

Major Ideas

1. Exchange rates state the value of one currency in terms of others and thus translate one country's prices into the currencies of others. Exchange rates therefore influence patterns of world trade. 2. If governments do not interfere by buying or selling their currencies, exchange rates will be determined in free markets by the usual laws of supply and demand. Such a system is called floating exchange rates. 3. Demand for a nation's currency is derived from foreigners' desires to purchase that country's goods and services or to invest in its assets. Under floating rates, anything that increases the demand for a nation's currency will make its exchange rate appreciate. 4. Supply of a nation's currency is derived from the desire of that country's citizens to purchase foreign goods and services or to invest in foreign assets. Under floating rates, anything that increases the supply of a nation's currency will make its exchange rate depreciate. 5. Purchasing-power parity plays a major role in very long-run exchange rate movements. 6. Over shorter periods, purchasing-power parity has little influence over exchange rate movements. The pace of economic activity and the level of interest rates exert greater influence. In particular, short-term capital movements are typically the dominant factor. 7. An exchange rate can be fixed at a nonequilibrium level if the government is willing and able to mop up any excess of quantity supplied over quantity demanded, or provide any excess of quantity demanded over quantity supplied. 8. Floating rates are not without their problems. For example, importers and exporters justifiably worry about fluctuations in exchange rates. 9. Under floating exchange rates, investors who speculate on international currency values provide a valuable service by assuming the risks of those who do not wish to speculate. Normally, speculators stabilize rather than destabilize exchange rates, because that is how they make profits. 10. The European Union has established a single currency, the euro, for most of its member nations resulting in no exchange rates between member countries.

Monetary Policy and Total Expenditure This section outlines the linkages of monetary policy:

1. Fed actions change money supply and interest rates. 2. The interest rate affects investment. 3. Investment affects aggregate demand. 4. Aggregate demand affects GDP. The effect of monetary policy on aggregate demand depends on the sensitivity of interest rates to the money supply, on the responsiveness of investment spending to the rate of interest, and on the size of the multiplier.

The demand for a currency is generated by:

1. Foreign demand for a country's goods and services 2. Foreign demand for a country's physical assets. 3. Foreign demand for a country's financial assets. Supply is generated by domestic demand for goods and services, physical assets, and financial assets (1-3 above) from abroad.

Why Inhibit Trade? - Reasons why countries might restrict trade:

1. Gain a price advantage for domestic firms 2. Protect particular industries 3. National defense and other noneconomic considerations 4. Infant-industry argument 5. Strategic trade policy Countries must be careful, however, because retaliation may eliminate their advantage and make all countries worse off.

Exchange rates will appreciate in countries whose:

1. Interest rates are higher 2. Economic growth rates are slower 3. Inflation rates are lower compared to other countries.

Planning Expansionary Fiscal Policy - Three types of fiscal policy can be used to stimulate the economy:

1. Raise government spending 2. Reduce taxes 3. Increase transfer payments

Planning Contractionary Fiscal Policy Three types of fiscal policy can be used to slow the economy:

1. Reduce government spending 2. Increase taxes 3. Reduce transfer payments Note: that the self-adjusting mechanism will eventually perform the same task when the economy is overheating, but at the cost of more inflation than will occur if the government succeeds in reducing aggregate demand.

Major Ideas

1. The Federal Reserve System is America's central bank. There are 12 Federal Reserve banks, but most of the power is held by the Board of Governors in Washington, D.C., and by the Federal Open Market Committee. 2. The Federal Reserve acts independently from the rest of the government. There is controversy over whether this independence is a good idea, and a number of reforms have been suggested that would make the Fed more accountable to the president or to Congress. 3. The Fed has three major weapons for control of the money supply: open-market operations, reserve requirements, and its lending policy to banks. But only open-market operations are used frequently. 4. The supply of reserves is controlled by Fed policy decisions. The demand for reserves depends primarily on the dollar value of transactions. The federal funds rate is the interest rate for reserves. 5. The Fed raises the money supply by purchasing government securities in the open market. When it pays banks for such purchases, the Fed provides banks with new reserves, which in turn lead to a larger money supply. Conversely, open-market sales of securities take reserves from banks and lead to a smaller money supply. 6. When the Fed buys bonds, bond prices rise and interest rates fall. When the Fed sells bonds, bond prices fall and interest rates rise. 7. The Fed can also increase the money supply by allowing banks to borrow more reserves, perhaps by reducing the interest rate it charges on such loans, or by reducing reserve requirements. 8. None of these weapons, however, gives the Fed perfect control over the money supply in the short run, because it cannot predict perfectly how far the process of deposit creation or destruction will go. 9. Investment spending (I), including business investment and investment in new homes, is sensitive to interest rates (r). Specifically, I is lower when r is higher. 10. This explains how monetary policy works in the Keynesian model. Raising the money supply (M) leads to lower r; the lower interest rates stimulate investment spending; and this investment stimulus, via the multiplier, then raises aggregate demand. 11. Prices are likely to rise as output rises. The amount of inflation caused by increasing the money supply depends on the slope of the aggregate supply curve. There will be much inflation if the supply curve is steep, but little inflation if it is flat. 12. In extreme cases such as the recession of 2007-2009, the Fed may have to resort to unconventional monetary policies including massive lending to financial institutions to prevent failure and open market purchases of assets other than Treasury bills.

Issue: The Partisan Debate Once More Toward an Assessment of Supply-Side Economics Supply-side tax cuts have their pros and cons.

1. The likely effectiveness of supply-side tax cuts depends on what kinds of taxes are cut. 2. Supply-side tax cuts probably will increase aggregate supply much more slowly than they increase aggregate demand. 3. Demand-side effects of supply-side tax cuts are likely to overwhelm supply-side effects in the short run. 4. Supply-side tax cuts are likely to widen income inequalities. 5. Supply-side tax cuts are almost certain to lead to smaller budget surpluses or larger deficits.

In a two-country supply-demand model without trade restrictions:

1. The price of a good must be the same in both countries. 2. The quantity of a good exported from one country must equal the quantity imported by the other.

Some Flies in the Ointment - Objections to the fiscal supply-side doctrine include:

1. The small magnitude of supply-side effects 2. The large effects on aggregate demand 3. The problems in timing (namely, the supply effects of a tax cut will take a long time to occur, while the demand effects will take only a short time) 4. The effects on income distribution 5. The loss of tax revenue

Why Trade? - Countries benefit from foreign trade for many reasons:

1. They can import resources they lack at home. 2. They can import goods for which they are a relatively inefficient producer. 3. Specialization sometimes permits economies of large-scale production.

ISSUE REVISITED: COMPARATIVE ADVANTAGE EXPOSES THE "CHEAP FOREIGN LABOR" FALLACY

A country can benefit from trade, even if wages in the other country are considerably lower than its own wages. Nothing helps raise living standards more than a greater abundance of goods.

Economic Activity and Exchange Rates: The Medium Run

A country's imports will rise quickly when its economy is booming and slowly when its economy is stagnating. Thus a country with a relatively high growth rate will experience growing imports, with a resulting increase in the supply and depreciation of its currency. Stronger economic performance appears to lead to currency appreciation because it improves prospects for investing in the country.

Some Harsh Realities

A fiscal policy planner's job is not simple. GDP changes continuously and forecasting models are imperfect, so it is hard to know if and how the economy is malfunctioning. Economists have only an uncertain knowledge of the value of the multiplier, the full- employment level of GDP, and the inflationary implications of different policies.

The Arithmetic of Comparative Advantage

A numerical example shows that, when countries differ in the relative efficiency with which they produce different goods, both world output and the welfare of each country separately can be increased when each country specializes in producing the goods for which it has a relative advantage, and then trades. When every country does what it can do best, all countries can benefit because more of every commodity can be produced without increasing the amounts of labor and other resources used.

Income Taxes and the Consumption Schedule

A tax increase lowers consumption spending and aggregate demand. An increase in taxes shifts the consumption schedule downward, whereas a tax reduction shifts the consumption schedule upward. Changes in taxes have multiplier effects on GDP through their effect on aggregate demand. An increase in taxes reduces equilibrium GDP, and a tax cut increases equilibrium GDP.

Income Taxes and the Multiplier

A variable tax, such as an income tax, lowers the multiplier, because when people's incomes rise, a larger amount is taken out in taxes than before, leaving a smaller increase in disposable income. Reasons why the oversimplified multiplier formula is wrong: 1. It ignores variable imports, which reduce the size of the multiplier. 2. It ignores price-level changes, which reduce the multiplier. 3. It ignores income taxes, which also reduce the size of the multiplier.

Capital Account

includes purchases and sales of financial assets to and from citizens and companies of other countries.

The Choice between Spending Policy and Tax Policy

Any combination of higher spending and lower taxes that produces the same aggregate demand curve leads to the same increases. The choice between G and T comes down, in part, to a difference in opinion about the desirable size of the government sector. Advocates of small government prefer to lower T in order to stimulate output, and to lower G when a restrictive policy is in order. Advocates of big government prefer the opposite policies. There is nothing about an activist fiscal policy that implies a preference for big government.

The Birth and Adolescence of the Euro

As part of the long-range goal of the European Union (EU) to create a unified market like that of the United States, they perceived a need to establish a single currency for all member countries—a monetary union. In 1999, electronic and checking transactions in 11 EU nations were denominated in euros rather than in national currencies; the number later grew to 16. The establishment of the euro and the withdrawal of the other national currencies mark a giant step beyond mere fixed exchange rates. It actually means abolishing exchange rates among the participating nations. Just as there has long been no exchange rate between New York and New Jersey, there is now no exchange rate between Germany and France.

Can Cheap Imports Hurt a Country?

Cheap imports are usually good for a country's consumers. Domestic producers may, however, be hurt.

When Governments Fix Exchange Rates: the Balance of Payments

Countries can maintain fixed exchange rates by buying or selling reserves to compensate for shifts in the demand or supply of their currencies. the balance of payments accounts come in two main parts: 1. The current account totes up exports and imports of goods and services; the United States has been running large current account deficits for years. 2. The capital account includes purchases and sales of financial assets to and from citizens and companies of other countries; in recent years, this part of our balance of payments accounts has registered persistently large surpluses, as foreigners have acquired U.S. assets. In a system of floating exchange rates, the exchange rates adjust in order to balance the balance of payments. In a system of fixed exchange rates, the balance of payments—perhaps best defined as all private international transactions, on both current and capital account, need not balance. With a fixed exchange rate, the balance of payments will likely be in either surplus or deficit. The country makes up for a surplus/shortage of its currency through selling/buying foreign currency reserves. A deficit cannot be maintained forever, because the country will run out of foreign currency reserves needed to buy its own currency. The accumulation of reserves rarely will force a central bank to revalue in the way that losses of reserves can force a devaluation.

Tariffs, Quotas, and Other Interferences with Trade

Countries can reduce imports by setting tariffs or quotas; they can promote exports by subsidizing export goods. A tariff is a tax on imports. A quota is a legal limit on the amount of a good that may be imported. An export subsidy is government payment to an exporter.

The Current "Nonsystem"

Currently, some exchange rates are fixed and some are floating. Few people think that rates can or should be fixed for a long time. Even in the case of floating rates, however, central banks often intervene to moderate exchange movements whenever they feel that such actions are appropriate. This process is sometimes referred to as dirty float or managed float. These days, gold has virtually no role in international finance; it is a purely private commodity.

Exchange Rate Determination in a Free Market

Exchange rates determined in the free market are known as floating exchange rates. The exchange rate of a currency is determined by its supply and demand. The demand for a currency comes from foreigners looking to buy the currency. The supply of a currency comes from domestic residents looking to sell their currency.

Money and the Price Level

Expansionary monetary policy causes some inflation under normal circumstances. How much inflation it causes depends on the state of the economy, as represented by the slope of the aggregate supply curve.

Automatic Stabilizers

Features of the economy that reduce its sensitivity to shocks are called automatic stabilizers. The personal income tax and unemployment insurance are examples of automatic stabilizers.

America's Central Bank: The Federal Reserve System CENTRAL BANK INDEPENDENCE

Fed board members are appointed to 14-year terms and are quite independent of political pressures. In some other countries, the central banks are less independent. Countries without independent central banks often have less stable economies.

The Bretton Woods System

From the end of World War II until 1971, countries tried to keep their exchange rates fixed to the U.S. dollar and to gold. The International Monetary Fund provided short-term financing to countries facing balance of payments deficits. Readjustments in exchange rates were permitted only in cases of "fundamental disequilibrium." Deficit nations were expected to follow restrictive monetary and fiscal policies voluntarily just as they would have done automatically under the gold standard. However, just as under the gold standard, this medicine was often unpalatable. The Bretton Woods system collapsed in 1971, in the face of the U.S. chronic balance of payments deficit.

Government Transfer Payments

Government transfer payments function as negative taxes.

Investment and Interest Rates

Higher interest rates lead to lower investment spending. The change in investment has a multiplier effect, lowering GDP. Lower interest rates have the opposite effect.

The Mechanics of an Open Market Operation

If the Fed buys securities, it pays for securities by creating new bank reserves, and these additional reserves lead to a multiple expansion of the money supply. When the Fed sells securities, it receives payment for securities by reducing bank reserves, reducing the money supply.

Risk Premium (or "spread")

Increased market interest rate to compensate the lender for the probability of loss if the borrower fails to repay the loan in full or on time.

A Last Look at the "Cheap Foreign Labor" Argument

Labor is cheap in countries where productivity is low, and expensive in countries like the United States where labor productivity is high. Under most circumstances, trade enhances our standard of living.

Interest Rates and Exchange Rates: The Short Run

Massive amounts of liquid capital cross national boundaries in search of interest rate differentials. Thus a country that increases its interest rates will experience a capital inflow, with a resulting increase in demand and appreciation of its currency. A decrease in its interest rates will have the opposite effect.

Money and Income: the Important Difference

Money is a stock; income is a flow.

How Monetary Policy Works in normal times

Of the four components of aggregate demand, investment and net exports are the most sensitive to monetary policy. We will study the effects of monetary and fiscal policy on net exports in detail in Chapter 19, after we have learned about international exchange rates. For now, we will assume that net exports (X - IM) are fixed and focus on monetary policy's influence on investment (I).

The PRINCIPLES OF Comparative Advantage

One country is said to have an absolute advantage over another in the production of a particular good if it can produce that good using smaller quantities of resources than can the other country. One country is said to have a comparative advantage over another in the production of a particular good relative to other goods if it produces that good less inefficiently as compared with the other country. Two countries can generally gain from trade, even if one of them is more efficient than the other in producing everything.

The Graphics of Comparative Advantage

Production possibilities frontiers for two countries can show different opportunity costs and the potential gains from trade. A country's absolute advantage in production over another country is shown by having a higher per-capita production possibilities frontier. The difference in comparative advantages between the two countries is shown by the difference in the slopes of their frontiers. Two very similar countries may gain little from trade. Large gains from trade are most likely when countries are very different. If two countries voluntarily trade two goods with one another, the rate of exchange between the goods must fall in between the price ratios that would prevail in the two countries in the absence of trade.

Dumping

Selling goods in a foreign market at lower prices than those charged in the home market.

The Idea behind Supply-Side Tax Cuts

Some people think that tax cuts will increase aggregate supply, thus allowing GDP to rise and the price level to fall. The tax cuts particularly favored are: 1. Lower personal income tax rates 2. Reduce taxes on income from saving 3. Reduce taxes on capital gains 4. Reduce the corporate income tax

Must Specialization be Complete?

Specialization need not be complete because: 1. some countries are too small to provide the world's entire output of a good. 2. the most accurate representation of the PPF would be a curved line implying increasing opportunity costs at either end of the curve.

Implementing Monetary Policy in normal times: OPEN-MARKET OPERATIONS

The Fed can increase the money supply by buying government securities on the open market.

MONETARY POLICY - CHANGING RESERVE REQUIREMENTS

The Fed can increase the money supply by reducing the required reserve ratios. The Fed can decrease the money supply by increasing the required reserve ratios. In practice, the Fed seldom changes the reserve requirements.

unconventional monetary policies

The Fed cannot use conventional policies if the federal funds rate is already zero and the economy continues to suffer a recessionary gap. Other options include: (1) massive lending to banks (2) open-market purchases of items other than Treasury bills

The Market for Bank Reserves

The Fed controls the position of the supply of reserves. The demand for reserves depends on banks' need for reserves, based primarily on the dollar value of transactions. The interest rate for reserves is the federal funds rate.

MONETARY POLICY - LENDING TO BANKS

The Fed lends to member banks, occasionally as a "lender of last resort." The interest rate it charges is called the discount rate. A reduction in the discount rate may persuade member banks to borrow more reserves and expand the money supply. An increase in the discount rate may discourage member banks from borrowing more reserves and contract the money supply.

America's Central Bank: The Federal Reserve System ORIGINS AND STRUCTURE

The Federal Reserve System, established in 1914, is the U.S. central bank. It is comprised of 12 district banks and is governed by a seven-member Board of Governors. Principally the Federal Open Market Committee makes decisions on the money supply.

Which Interest Rate?

The Federal Reserve can easily control the federal funds rate and the Treasury bill rate but other interest rates are more difficult to control. Riskier borrowers pay higher interest rates than safer borrowers due to the higher risk of default.

The Volatile Dollar

The U.S. dollar appreciated sharply from 1980 through 1985 and then depreciated even more sharply from 1985 to 1988. The dollar fell from 2002 to 2004, was stable until 2007-2008, and then declined dramatically before righting itself.

From financial distress to recession

The failure of a major financial institution or a crash in an asset market will cause a loss of confidence with regard to the ability of various debtors to repay their loans. Greater fears lead to risk premiums and increased interest rates. Higher interest rates lead to a decrease in consumption and investment spending.

MONETARY POLICY - QUANTITATIVE EASING

The most controversial form of unconventional policy that the Fed used during the 2007-2009 financial crisis was its purchase of assets other than T-bills.

Tax Multiplier

The multiplier for changes in taxes is smaller than the multiplier for changes in government purchases. While G affects aggregate demand directly, T initially changes only disposable income, and the resulting initial change in consumption is less than the change in disposable income. If G and T increase by the same amount, the former will increase GDP and the latter reduce it, but because G's multiplier is larger, the net effect will be an increase in GDP.

The Purchasing-Power Parity Theory: The Long Run

The purchasing-power parity holds that exchange rates adjust so that over the long run the same good costs the same, whatever currency it is measured in. Thus the exchange rate should reflect differences in price levels. If one country has a higher inflation than another, its exchange rate should be depreciating. The theory is inadequate for short-run changes, but plays an important role in the long run.

What are exchange rates?

The rate at which one currency is transformed into another is called the exchange rate. When one currency becomes more expensive in terms of another, it is said to appreciate; the other currency depreciates. In a system of fixed exchange rates, the corresponding movements are called revaluation and devaluation.

The Role of the IMF

The role of the International Monetary Fund (IMF) in the current nonsystem is quite different from what it was under the old Bretton Woods system. No longer the policeman of fixed exchange rates, the IMF has evolved into a general-purpose international fire-and-rescue squad instead.

Why Try to Fix Exchange Rates?

Those in favor of fixed rates think that floating rates are so unpredictable that they reduce the amount of international trade. However, the experience with so-called "fixed rates" was that they were unpredictable and unstable. Floating rates are not as variable as one might fear, because speculators intervene in foreign exchange markets to smooth out the highs and lows.

Adjustment Mechanisms under Fixed Exchange Rates

Under a system of fixed exchange rates, a country's government loses some control over its domestic economy. There may be times when balance of payments considerations force it to contract its economy in order to cut down its demand for foreign currency, even though domestic needs call for expansion. Conversely, there may be times when the domestic economy needs to be reined in, but balance of payments considerations suggest expansion.

The Classical Gold Standard

Under the gold standard, currencies were fixed in value to gold. Payments imbalances were rectified by changes in the domestic economy. Adherence to the gold standard thus meant that countries lost the ability to control their domestic economies very well because monetary policy must be dedicated to pegging the exchange rates than used to manage aggregate demand.

From Models to Policy Debates

We have done all the theory that is needed. The next chapters of the text turn to policy debates.

Tariffs versus Quotas

When imports are to be reduced, tariffs are generally preferable to quotas because: 1. Tariffs generate income for the government. 2. Unlike quotas, tariffs offer special benefits to more efficient exporters.

Open-Market Operations, Bond Prices, and Interest Rates

When the Fed buys bonds, it increases the demand for them and consequently raises their price. A rise in the price of bonds is equivalent to a fall in the interest rate. Similarly, when the Fed sells bonds, it lowers their price and raises the interest rate.

Application: Why the Aggregate Demand Curve Slopes Downward

When the price level rises, the demand for money rises, and this in turn causes interest rates to rise and investment to fall. The fall in investment has a negative multiplier effect on GDP. Thus a higher price level is associated with a lower GDP.

Mutual Gains from Trade

When trade is voluntary, both sides must expect to gain from it; otherwise they would not trade.

Central Bank

a bank for banks. The U.S. central bank is the Federal Reserve System.

Absolute Advantage

a country can produce a good using smaller quantities of resources than can another country.

Specialization

a country devotes its energies and resources to only a small proportion of the world's productive activities.

Comparative Advantage

a country produces a good less inefficiently as compared with another country.

Mercantilism

a doctrine that holds that exports are good for a country while imports are harmful.

Strategic Argument for Protection

a nation may sometimes have to threaten protectionism to induce other countries to drop their own protectionist measures.

Export Subsidy

a payment by the government to exporters to permit them to reduce the selling prices of their goods so they can compete more effectively in foreign markets.

Devaluation

a reduction in the official value of a currency.

Bretton Woods System

a system of fixed exchange rates in which the U.S. dollar was fixed in terms of gold and all other currencies were fixed in terms of the dollar.

Tariff

a tax on imports.

Monetary Policy

actions that the Federal Reserve System takes in order to change interest rates and the money supply in an effort to affect the economy.

Revaluation

an increase in the official value of a currency.

Gold Standard

fixed exchange rates in which each participating currency is valued in terms of gold and holders of each participating currency are allowed to convert that currency into gold.

Current Account

includes international purchases and sales of goods and services, cross-border interest and dividend payments, and cross-border gifts to and from both private individuals and governments.

Quantitative Easing

open-market purchases of assets other than Treasury bills.

Floating Exchange Rates

rates determined in free markets by the law of supply and demand.

Fixed Exchange Rates

rates set by government decisions and maintained by government actions.

Risk of Default

risk that the borrower may not repay a loan or security on full or on time.

Trade Adjustment Assistance

special unemployment benefits, loans, retraining programs, and other aid to workers and firms that are harmed by foreign competition.

Quota

specifies the maximum amount of a good that is permitted into the country from abroad per unit of time.

Infant-Industry Argument

trade protection for new industries to be protected from foreign competition until they develop and flourish.

Unconventional Monetary Policy

unusual forms of central bank lending and unusual types of open market operations.

Depreciation

when a unit of a country's currency can buy fewer units of foreign currency.

Appreciation

when a unit of a country's currency can buy more units of foreign currency.

"Dirty" or "Managed" Float

when the government intervenes from time to time to influence the value of its currency.