Econ Part 2

What happened at Camp David?

2 things were decided by Nixon: 1. Continue macroeconomic policy to reduce UE 2. End the convertibility of the dollar into gold (so dollar would be devalued) THIS MEANT THE END OF THE BW SYSTEM

What are examples of international externalities? How can they be addressed?

Acid rain, greenhouse gases -Cooperation across countries is necessary to address these

What is monetary policy?

Actions taken that affect the availability and cost of money and credit.

How do you get the overall BOP position?

Add the current and capital account -This can result in a BOP surplus or deficit.

What is the overall trend in global inequality?

Inequality between all peoples of the world has stabilized since 1990 (although still high). -Biggest take away is that GLOBALIZATION has NOT widened inequality

How does borrowing from foreigners affect a country's currency?

It can drive it up directly because foreigners lending to Americans must do so by buying things like American bonds, mortgages, and other securities. This means they must BUY dollars causing the dollar's value to go up (appreciation). -The stronger dollar makes imports cheaper for Americans and makes local producers sell less of what they make, so the trade deficit grows.

How did Congress react to claims by businesses that the 1980s decline was all Japan's fault?

It began making threats in the form of possible trade barriers.

What are the disadvantages of a soft peg?

It can make a country vulnerable to financial crises which can lead to big devaluations or the abandonment of the peg. Also, soft pegs are typically short-lived.

How does labor know what the inflation rate will be in the future?

It doesn't. It bases its expectations off of things like the government's track record, evidence that the government plans to increase or decrease inflation, the party in power, or even the position of the government in the electoral cycle.

Why was Germany resistant to the monetary union? (AKA why is it always resistant?)...Why did it eventually agree to it?

It feared that it would be forced to accept higher inflation as other countries were willing to accept it. -It complied because France offered its support for German political and economic reunification (Berlin Wall context)

How is global inequality linked to patterns in economic growth? How does this relate back to advanced nations?

It has fallen as China and India have caught up! Some argue, however, that this has been at the expense of advanced industrialized nations whose middle classes have had stagnant wages

How does electoral competition affect the credibility of CBI?

It has incentives to guard the bank from government interference because it will dispel any wrongdoing of the government in power to benefit itself.

How does bargaining power between MNCs and host countries relate to control?

It is a function of monopolistic control. Whichever side has a monopoly of control will reap more gains from the investment. This is based on who has more of what the other values.

When did the BW system begin and what was so unique about it?

It is an innovative monetary agreement that began in 1944. It serves as an explicit code of conduct for international monetary relations. -It was unique because it offered a COMPROMISE between stability and autonomy.

What is the current-account balance?

It is equal to the difference between national income and expenditures by a country.

What is the discount rate?

It is the interest rate at which the central bank loans to other banks.

Although part of the Impossible Trinity, why doesn't Oatley mention the choice of closed financial markets?

It isn't realistic today because of globalization. EVERYONE participates in international trade!

Explain the long-term effect of unexpected increases in inflation.

It lowers real wages, so more people will be hired. This means there is less unemployment. BUT...to attract workers(which are now fewer), companies will offer higher wages. Thus, wages are now up (the opposite scenario), so the demand for labor falls and there is yet again a natural rate of unemployment.

What does a current-account deficit mean?

It means that a country's spending on goods and services is greater than its investments with the rest of the world.

What is the natural rate of unemployment?

The rate of unemployment to which the economy will return following a recession or economic boom. It is never zero and can be substantially above it (because there will always be some unemployment).

What happens if the nominal wage agreements turn out to be mistaken in their inflation expectations?

The real wages of workers will rise or fall.

In contrast to the Phillip's curve, contemporary economic theory holds that...

There is no stable trade off between unemployment and inflation due to the natural rate of UE. Governments can only move above or below this for a short period of time.

What are the problems associated with the nonpolitical theories/reasons for adopting pegs?

There isn't historical data to collaborate them. Currency unions are rarely welfare-enhancing. Instead, they're the result of political aims.

Why did the 2nd monetary system, the gold exchange system, fail?

There was little international monetary cooperation, so it was unstable. The depression ultimately brought the system down.

Why was making a credible commitment to price stability so difficult for governments?

There were TIME-CONSISTENCY PROBLEMS.

In the late 1800s, there was open immigration but closed trade (opposite today). How is public opinion to blame for this change in immigration policy?

There's a perceived job market threat from immigrants. It's thought that there will be higher taxes to pay for increased welfare programs. -Also a feared loss of national identity

BITS have spread in recent years. What are these?

These are Bilateral Investment Treaties. These are legal mechanisms by which host and home countries regulate the investment of MNCs. -A sort of DECENTRALIZED system of regulation -These help investors by increasing the number of unilateral withdrawals.

What are mortgage-backed securities?*

These are securities that lump different risks together into one instrument. A single security can then be sold to investors.

How do civil liberties play a role in CBI credibility?

They allow the public to better monitor the government's behavior (e.g. media sources).

How are "asset bubbles" caused? In what was the asset bubble in the US?

They are caused by borrowing in large amounts at low IRS. -The asset bubble was in residential real estate.

What do politicians typically do in the run-up to an election when it comes to currency?

They boost voters' incomes via currency appreciation and then devalue only after the new government is in office. Voters like more purchasing power and to see what looks like a strong domestic economy, so they are more likely to favor the incumbent government. After the outcome is revealed, however, there is no need to continue such monetary policy. -The PRI in Mexico did this from 1970-1994

How can migrants be a complement in the workforce?

They can create other jobs for natives. For example, if there are dishwashers, more natives can be managers of restaurants. Also, high-skilled migrants spark innovation which results in new products, markets and jobs for such!

Why is inflation bad for investors?

They can't mitigate their risks well, so they invest less and the economy fails to grow as a result.

What do exchange rates do?

They determine the value of a country's currency versus another's currency.

Why do host countries bargain with MNCs? Why do MNCs bargain?

They do so in order to reach an agreement on how the income generated by investment will be distributed between the MNC parent and host country.

Why do firms integrate horizontally?

They do so when a cost advantage will result from placing a large number of plants under administrative control. These cost advantages arise from intangible assets.

How do central banks affect wage bargaining?

They establish trust. This, in theory, should lead to lower inflation.

How could governments end inflation and not suffer the consequences of high unemployment?

They had to convince workers and businesses that they were really going to lower inflation. This meant that they had to make a CREDIBLE COMMITMENT to price stability.

Why are autocracies more likely to go for a peg?

They have to look for a more transparent form of commitment since their political system is more opaque (less trustworthy). The peg provides the transparency that is lacking in the political system.

The partisan model: Leftist parties

They have traditional given priority to achieving a low level of UE (which requires higher inflation) -They will try to shift the economy to the upper LEFT portion of the Phillip's curve -They have more ties to organized labor and therefore place great value on employment -They are less likely to maintain a fixed exchange rate because expansionary policies (what they prefer) will reduce domestic IRs to raise domestic demand, thereby allowing for higher employment

How did governments seek to deal with the 2007-2008 financial crisis most broadly?

They held a series of G20 summits to coordinate their responses to the crisis. These resulted in the decision to boost the economy via financial stimulus, give the IMF more lending capability, and establish a "Financial Stability Board" in charge of monitoring these efforts.

Why are market imperfections significant in understanding MNCs?

They help us understand why firms sometimes take their transactions out of the market and place them under the control of a single corporate structure (so like opening a new plant)

How is a BOP adjustment carried out in the floating rate system?

They occur through EXCHANGE-RATE MOVEMENTS.

Why do European governments want more stable intra-European exchange rates?

They primarily engage in trade with one another.

In Paris, when negotiating the Paris Accord, what did governments decide must be done to balance global current-accounts (again, 1980s context)?

They said that COORDINATED macroeconomic policies must be carried out. This meant that... -SURPLUS countries were to adopt more expansionary fiscal policies (e.g. reducing taxes, etc.) to create more domestic demand and to increase consumption/imports -DEFICIT countries were to adopt more RESTRICTIVE fiscal policies to reduce the budget deficit; this meant DECREASING DOMESTIC DEMAND and decreasing imports

What do opponents of immigration say about immigrants?

They suppress wages of native workers, threaten national identity, create security risks, and impose welfare burdens.

Why are defenders of globalization against labor standards? What do they say should happen instead?

They think they will make developing countries less attractive for investment and that this will push them BACK into poverty. They'll be less attractive because production will become costly through higher wages or costly production techniques/equipment. -They say that working conditions will improve over time since they're linked to productivity. Productivity will make wages rise with time.

Review of state-centered approach: How do governments seek to "tie their hands" since political control of monetary policy diminishes social welfare (since it generates too much inflation)?

Through independent central banks and fixed exchange rates

The 1980s economic decline in the US was attributed to what by businesses?

To Japanese economic practices. Businesses began bashing Japan.

What is the intention of fair trade?

To correct the legacy of colonial system and prevent exploitative capitalist practices whereby privileges are obtained from governments

What is the enforcement problem with global labor standards?

To enforce the standards, governments would have to be able to restrict trade with countries violating these rules, and restricting trade can be used illegitimately, as a form of protectionism

How was the European monetary system used by European governments in the 1980s?

To establish a credible commitment to price stability. -The European monetary system (EMS) did so because it was centered on the German central bank (the Bundesbank...most independent) -Governments IMPORTED German monetary policy by PEGGING their currency to the German mark.

Describe what is meant by "high pass through" when it comes to the level of exchange rate.

Tradable industries with "high pass through" are more likely to see their prices change due to fluctuations in exchange rates, so they favor a weak currency (a depreciated floating rate) -Pass-through is higher in standardized goods and primary commodities, so the level of exchange rate is a big concern in developing countries.

There isn't a linear (monotonic) relationship between traded the environment; how do composition and techniques of economic growth offset the scale effects on the environment?

Trade and investment can diffuse technology. Upgraded technology means less waste. Rising incomes can change values. More concern for the environment.

What do baskets of currencies usually represent?

Trade-weighted averages of the economy.

Where else in the world did we see debt-financed consumption in the 2000s?

UK, Ireland, and Spain

What was the outcome of the choice of European governments to peg to the German mark?

Unions and governments were never convinced by this commitment (via a fixed exchange rate) because they knew the government could intervene at any time.

How are politics brought into exchange-rate policy?

Via the society-centered approach and the state-centered approach

Give an example of MNCs not handling economic transactions "through the market".

Volkswagen decided to build some of its cars in Mexico. It COULD have signed contracts with locals to get the components for assembly; however, it instead constructed an assembly plant in Mexico.

How exactly did governments seek to move towards institutionalization in terms of exchange-rate cooperation?

Well, one prospective idea was a "target zone" by which international currencies would have a central parity surrounded by wide margins within which the currency could fluctuate. -When a currency moved outside of these margins, the governments would be obliged to intervene either in the foreign exchange market or in the domestic economy by changing IRs.

What is horizontal integration?

What occurs when a firm creates multiple production facilities all producing the SAME goods. Horizontally-integrated MNCs create THE SAME PRODUCT IN MULTIPLE NATIONAL MARKETS

What is price stability? Where did it begin?

Achieving and maintaining a very low and stable rate of inflation -GB with Margaret Thatcher

What did Congress propose for dealing with China's surplus/"unfair policies"?

"Get tough on China trade policy" via tariffs

By 2007, the US' (term) had deteriorated sharply.

"International investment position"

Explain the effects of unexpected increases and decreases in inflation on unemployment in the short-run (respectively).

-An INCREASE in inflation (generated by monetary expansion) will LOWER the real wages of workers which will reduce unemployment (increase employment since labor is cheaper) -A DECREASE in inflation (resulting from monetary contraction) will raise real wages (making labor more expensive) thereby increasing unemployment (decreasing employment)

How do central banks increase or decrease the amount of money in the banking system?

-Changing the discount rate (short-term interest rates) -Conducting open market ops (like buying government bonds to increase the money supply) -Modifying reserve requirements (lowering these lets bank loan more money so more money in economy)

Although boycotting worked for a while, why may it not work now?

-Factories are made to pass inspections -Big companies outsource to megasuppliers, so it's hard to track especially since we tend to focus on the largest brands

How does the choice of open or closed trade affect the assumptions of the S-S model that open policies should come together? *

-In states with little labor, when trade is restricted, labor-intensive production must take place at home. This makes wages higher and is bad for business. This means these states will push for open immigration. -In states with little labor (again), when trade is opened, labor-intensive production doesn't happen at home, so these firms go out of business. Thus, they no longer push for open immigration since they don't need labor at home. The pushes of nativists, labor, and taxpayers make anti-immigration popular.

How has globalization affected living standards?

-It's made huge improvements in the quality of goods we consume bcuz specialization & competition have led to improvement -Globalization has been ASSOCIATED with rising incomes (aka economic growth)

The sectoral model: argument

-It, unlike other models, does NOT assume that all governments value monetary autonomy over exchange rate stability but rather that government preferences REFLECT those of interest groups -AND interest groups hold different preferences about the trade-off between domestic economic autonomy and exchange-rate stability -Says that ULTIMATELY, exchange-rate policy is determined by the group with the greatest influence

What do those who believe that globalization HAS caused sweatshops advocate for? Why do they say these things are necessary?

-Linking access to global markets to adoption and enforcement of standards -Enforceable global labor standards THEY BELIEVE THEY ARE NECESSARY BECAUSE... -the markets wont fix injustices; developing countries cant enforce own laws; a sweatshop is still a sweatshop even if it's better than alternatives; not all work in developing countries is freely entered into

How can a country's real exchange rate rise?

1. prices can stay the same while the currency rises in nominal value 2. the currency can stay the same while prices and wages rise

Which countries peg to the U.S. dollar and why?

-Most of the Caribbean: because their main source of income comes from tourism paid in dollars. -Africa typically ties to Euro -Many Mid.Eastern countries (yes): because they depend on US for oil trade; thus, dollar gives them stability -Hong Kong and Malau fix to dollar in Asia

How are various groups impacted by exchange-rate policy choices? Details.

-Sectors with economic interests damaged by exchange-rate movements place considerable value on exchange-rate stability; these are generally those with business in international markets; they are less concerned with domestic economic conditions; their desires make them prefer fixed rates -Sectors who conduct most of their business domestically want to be sure that economic conditions provide enough demand, so they put a lot of value on monetary-policy autonomy; this desire makes them prefer floating rates

What can we note about MNCs and their relationship with highly advanced countries?

-The actions of MNCs are mainly concentrated in highly advanced industrialized countries -These countries are the largest suppliers AND recipients of FDI (think US, Japan, & the countries of Europe)

What are the problems with fair trade?

-The premiums paid by consumers go to a cooperative instead of directly to farmers -The quality of fair trade coffee is uneven; thus, farmers have the incentive to employ lower quality beans and receive the same returns -The price floor is acting as a price ceiling; it makes farmers want to stay in the business even when the market is pushing the other way -Standards are complicated from country to country

Give some examples of the international currency standard.

-The special drawing rights from the IMF; this is like paper gold; it's a mix of national currencies -Currently, the int. currency standard would be the dollar or euro since fictitious currencies are hard to reach an agreement upon.

What is the fixed-but-adjustable system?

-The system promoted via Bretton Woods after WW2 and the EU between 1979 and 1999. -Currencies have a fixed rate against a standard but governments CAN occasionally intervene.

What are some of the characteristics of a floating exchange rate system?

-There is no government involvement in determining the value of a currency against another. -The currency in UNLIMITED in its movement in the foreign exchange market -Governments DO NOT maintain a fixed price but rather the value of one currency in terms of another is determined by PRIVATE ACTORS

What are the 2 views of MNCs?

-They are productive instruments of a liberal economic order (they ship capital to where it is scarce, transfer technology, and manage expertise from 1 country to another) -They are instruments of capitalist domination (they control critical sectors of their hosts' economies and make decisions about the use of resources with little regard for host country's needs)

How and why did the BW system provide capital controls?

-They did so with exchange-rate restrictions; that is, governments limited the use of foreign exchange -Governments limited capital flows because they thought they were to blame for unstable exchange rate in interwar years.

The partisan model: rightist parties

-They give priority to maintaining low inflation (which means higher UE) -They have ties to business interests, the financial sector, and middle class; all are concerned with protecting the real value of their financial assets (which inflation erodes) -They are more likely to want a fixed exchange rate because restrictive monetary policies (what they prefer) don't lead to capital outflows (money going out due to spending) or increased domestic demand which would result in inflation

How can globalization HELP the environment?

-Through CONSUMER POWER (example seen in the tuna-dolphin safe labeling- the US refused to buy tuna from MX if nets weren't dolphin safe) -Through MULTILATERAL INSTITUTIONS (they can help push for protection! The WTO has actually helped!, NAFTA) -Through CROSS-COUNTRY STATISTICS (countries can learn from others' experiences)...and wealthy countries may use their wealth to clean up the environment

Describe the argument that globalization has NOT caused sweatshops.

-Workers in developed countries are more productive, so we can't just compare wages -We need to think about opportunity cost. Workers in developing countries just don't have better alternatives. -Difference between wages in local factories and MNCs (they usually double) -Workers in MNC factories actually work less than they would in local factories

Quick facts regarding the current refugee crisis

-more than 60 million without homes due to conflicts around the world, namely Syria -Refugees are fleeing Europe through some dangerous routes -Canada has accepted 40,000 yet the US very few despite fact that Canada has one-tenth of the population

What are the 4 international monetary systems since 1820?

1. 1820-WW1: Classical gold standard 2. 1914: The gold exchange system emerged 3. 1945: Bretton Woods Agreement 4. 1975: The floating rate system (still around today)

What 3 specific country characteristics comprise the idea of locational advantages?

1. A large reserve of natural resources (tie to natural resource investments) 2. A large local market (tie to market-oriented investments) 3. Opportunities to enhance operational efficiency (tie to efficiency-oriented investments)

What are the 3 positive impacts of MNCs on host countries?

1. Can bring them resources that arent easily acquires (via FDI; this allows them to draw on the savings of the world and grow faster) 2. Can bring technology and managerial expertise (This is because MNCs control intangible assets; once they invest in a host country, the host country has access to that knowledge; this transfer of knowledge generates POSITIVE EXTERNALITIES) 3. MNCs can enable host country producers to gain access to marketing networks via association

What are the 7 negative impacts of MNCs?

1. Can reduce the amount of funds available for investment in a host country (because they borrow on the host country's capital market instead of bringing capital from their own country; this "CROWDS OUT" domestic investment 2. MNCs often earn rents on their products and send them back to their home country (so doesnt benefit host) 3. Generally charge host country affiliates licensing fees or royalties for any technology that is transferred, and these fees are sent back home 4. MNCs often require the local affiliate to purchase inputs from other subsidiaries of the same corporation (done through "transfer pricing") 5. Can drive established host-country firms out of business because the MNCs' technological/managerial skills give them a cost advantage 6. Sometimes spillover effects don't happen because MNCs can choose not to involve the host country firms in order to protect their intangible assets 7. Decisions made by the MNC about how to use revenues generated by their host country may not correlate well with country objectives -Ex: if a country's exports are mainly in copper but an MNC owns the mining operations, then decisions about foreign exchange earnings are made by the MNC

The IMF is intended to limit 2 kinds of opportunistic behavior. What are these?

1. Competitive devaluations (to enhance competitiveness of their exports) 2. Abuse of the stabilization fund (easy access would let countries have huge balance of payments deficits)

What are the 2 types of proposed standards by anti-sweatshop people?

1. Core labor standards: freedom of association, collective bargaining, abolition of forced labor, prevention of discrimination in employment, and minimum age for employment 2. Cash standards: achieving workplace conditions that affect wages like maximum working hours

What are Broz's 2 hypotheses?

1. Countries with opague political systems will have a higher probability of adopting a peg. 2. Legal CBI has a negative effect on inflation particularly in transparent nations.

What are the two hypotheses regarding the future for exchange-rate regimes?

1. Currency blocs will be realities to simply cross-border transactions 2. There will be a continued use of national currencies tethered to different anchors allowing for floating benefits and independent monetary policy

Why might a government opt for a fixed exchange rate? What are the problems with these reasons?

1. Currency union between 2 countries can be welfare improving when factors are mobile between them or when they have similar structures. 2. A fixed system can overcome the time-inconsistency problem of anti-inflationary commitments by authority; in other words, a government can signal its seriousness about non-inflationary policy by pegging to another currency since the peg will fall apart if it doesn't follow consistent macroeconomic policies. ***Problem: They assume that policy is only made on welfare grounds. This would mean that politicians don't depend on domestic support and that the biggest political pressures regard improvements in social welfare.

What are the 2 big categories for balance of payments?

1. Current account: the non-financial transactions between the U.S. and the world; these are goods and services -The current account balance would be the payments by Americans to foreigners vs. the payments to U.S. residents. 2. Capital account: the financial flows that a country performs (via purchases of stocks, bonds, even factories)

How could dollar overhang be solved to save the BW system from crisis (3 ways)?

1. Devalue the dollar against gold 2. Restrain economic activity in the US to reduce US imports 3) Expand economic activity in the rest of the world, having them buy US imports GOVERNMENTS DID NOT OPT FOR ANY OF THESE INTERESTS. COMPETING INTERESTS (US foreign policy goals, lack of desire of others to revalue their currencies)

What 4 innovations were provided by the BW system?

1. Exchange-rate FLEXIBILITY 2. Capital controls 3. Stabilization fund 4. IMF

What are the clear policy preferences regarding the level of exchange rate (AKA strength of the currency) that come about due to the sector model?

1. Export-oriented & import-competing prefer a weak/undervalued currency (because this makes their goods more competitive globally due to relative cheapness AND it reduces competitiveness of foreign goods domestically) 2. The non-traded goods prefers a strong/overvalued currency (because their incomes rise as a result! More purchasing power! Foreign goods become cheaper and local producers must match these falling falling prices) 4. The financial sector is again mixed

What are the clear policy preferences regarding the type of exchange-rate system that come about due to the sector model?

1. Export-oriented prefers a fixed exchange rate (need stability due to international econ. interests) 2. Non-traded goods prefer a floating system (not deeply integrated in international econ.; revenue results from domestic sales, so doesn't want gov't intervention to hurt local economy) 3. Import-competing prefers a floating exchange rate (for same reasons as non-traded) 4. Financial services sector is unclear.

What are the 4 historical principles that have "governed" FDI?

1. FDIs are private property and should be treated at least as well as domestic private property. 2. Governments have the right to expropriate investments BUT ONLY FOR A PUBLIC PURPOSE 3. When a government does expropriate a foreign investment, it must compensate the owner of the full value of the expropriated property 4. Foreign investors have the right to appeal to their home country in the event of a dispute with the host country.

What are the 2 dimensions of preferences for exchange-rate policies?

1. Fixed or floating 2. Strong or weak currency

Why was the 2007-2008 crisis global? 3 reasons.

1. GB and Spain had their own real-estate bubbles 2. European financial institutions had purchased mortgage-backed securities in large quantities. 3. The subsequent freezing of global credit made it hard for all financial institutions to get needed credit....As credit dried up, interest rates increased.

What are 2 recent observations regarding MNCs?

1: We've seen a huge increase in the number of MNCs operating in the global economy 2: the total amount of FDI has greatly increased over the last 25 years

What 2 trade models can be applied to migration?*

1. Heckscher-Ohlin 2. Specific-factors model

What are the 2 types of market imperfections?

1. Horizontal integration 2. Vertical integration

What are the 2 commitment mechanisms that "solve" the time-consistency problem thus achieving price stability? What do each of these have in common?

1. Independent central banks 2. fixed exchange rates -BOTH ARE INSTITUTIONS!!

What are the 3 society-based models of monetary and exchange-rate politics?

1. Institutional 2. Partisan 3. Sectoral

Why was the United States' inability to implement the 4 principles into the WTO and the subsequent win for developing countries (the creation of a final set of articles that elaborated their right to regulate) significant?

1. It meant that there would be no international rules governing FDI 2. It reflected the basic conflict that continues today over FDI.

MNC activities in the developing world have increased greatly in recent years. In what ways do we see this?

1. MNCs have been investing more heavily in developing countries -These investments, however, havent been evenly distributed; been made mainly in Latin America and in a small number of Asian countries 2. Some developing countries have emerged as home bases for MNC parent firms -This too has been confined to just a few developing countries

What are the problems with the electoral approach?

1. Offers only a limited explanation of exchange-rate policy; a government might abandon a fixed rate prior to an election, but it tells us little about said policy at other times 2. Doesn't offer us deterministic predictions; it doesn't claim that all governments will abandon a fixed rate prior to an election, just that there's incentive to do so

What are the two common measures for the monetary standard?

1. THE COMMODITY STANDARD- the use of a commonly traded commodity like precious metals (gold) or even pork bellies against which to measure other goods. 2. THE INTERNATIONAL CURRENCY STANDARD- a fictitious unit at which goods can be priced

What were the 3 effects of deficit spending by the US?

1. The government was able to cut taxes 2. The government increased its spending which put more money in the hands of Americans and stimulated the economy 3. The government could increase military spending

What are two non-political explanations for adopting pegs?

1. They can be welfare-enhancing....when countries are subject to the same shocks, when they have similar economic structures. 2. Fixed exchange rates help overcome "time-inconsistency problems" meaning that they create discipline by making a country commit to anti-inflationary measures; governments have to follow through with macroeconomic policies that don't threaten the peg or the peg will collapse.

Why are developing countries more prone to regulate MNC activity than developed countries?

1. They've been more vulnerable to foreign domination because their economies are less diversified. NRs are politically-sensitive. 2. They've historically HOSTED MNCs rather than been MNC base countries. They haven't been susceptible to retaliation like MNC home bases. 3. Developed and developing countries have been fundamentally different in how they've approached state intervention. Those with more have been developing (e.g. ISI)

What are the 4 interest groups into which the sector model divides domestic actors?

1. import-competing 2. export-oriented 3. nontraded goods 4. financial services industry

What did the Bush adm call the imbalance?

A "global savings glut", referring specifically to very high savings rates in Asia and China's stabilization of the RMB against the dollar

What are the disadvantages of a fixed exchange rate?

A country has no independent monetary policy because its interest rates are tied to those of the anchor-currency country.

Why might a country need a BOP adjustment?

A country might have a current-account deficit that it cannot fully finance through capital imports; or, it could have a current-account surplus.

What was the Stabilization Fund?

A credit mechanism consisting of a pool of currencies provided by member countries. -Every country was assigned a share of it and governments could access it when they faced a balance of payments deficit -By accessing the fund, countries wouldn't need to devalue their currency or stop importing

What is a currency war?***

A currency war is when a nation's central bank uses expansionary monetary policy to lower the value of its money. -Low currency values aid exports by making them cheaper in comparison to other countries' exports. That helps businesses and boosts economic growth. It also makes imports more expensive. That hurts consumers and adds to inflation. -It was first used to describe the competition between the United States and China to have the lowest currency value in the 2000s.

What is an MNC?

A firm that controls and manages plants in at least 2 countries. -important sources of foreign capital for the countries that host their affiliates

The only way to manage the domestic economy is to adopt what type of exchange-rate system?

A floating system

The overall reluctance of governments to adjust in the 2000s led to what? What was the specific cause of this consequence?

A great financial crisis -The crisis resulted from the mass flow of cheap credit to the US from foreign countries

What is an exchange-rate system?

A set of rules governing how much national currencies can appreciate and depreciate in the foreign exchange market.

What is fair trade? What does it require? What about prices?

A social movement whose stated goal is to help producers in developing countries achieve better trading conditions and to promote sustainable farming. Fair trade certification requires producers to meet labor, environmental, and production standards. -There is a price floor so that when prices rise, the fair trade price paid is always higher.

What is a sweatshop? What's the evidence that these exist (financial)?

A workplace defined by extreme exploitation, the absence of a living wage and benefits, poor working conditions, and arbitrary discipline. -There's a huge wage discrepancy between developing and developed countries (10x in same job)

What is the advantage of a floating system? Disadvantages?

A: Countries get to control their own monetary policy. Ds: The foreign exchange market (and others) must be DEEP enough to absorb shocks without changing the exchange-rate. Also, financial INSTRUMENTS must be available to hedge the risks posed by a fluctuating exchange rate.

The contemporary economic theory regarding monetary policy and unemployment made governments do what in the 1980s?

Abandon the Keynesian approach in favor of an alternative approach to monetary policy: the pursuit of "price stability"

What countries have floating systems?

Almost all advanced economies and emerging market economies ...HOWEVER many countries have a floating system but do not intervene even to limit short-term changes like New Z., US, Sweden, Iceland, and the Eurozone)

What is the Impossible Trinity?

Also known as the "unholy trinity", this is the "policy trilemma" by which it's impossible for governments to maintain 3 goals at once: 1. Fixed exchange rate 2. Capital mobility (AKA integration with the rest of the world via international trade) 3. Autonomous monetary policy ***GOVERNMENTS MUST CHOOSE ONLY 2! One must be forgone!

What are some examples of MNCs engaged primarily in market-oriented investments?

American automotive MNCs; they made direct investments in the EU in the 1960s to gain market access -Also, during the 80s and 90s, Japanese and German automotive MNCs built plants in the US due to the "voluntary export restraints" in place that limited auto imports

Explain the BOP adjustment process for the US under a floating rate system if the US has a BOP deficit.

Americans are selling more dollars than the Japanese want to buy so the dollar begins to depreciate against the yen. BUT GOVERNMENTS DON'T INTERVENE. Americans are forced to accept fewer yen for each dollar. This causes the dollar to depreciate, making Japanese goods more expensive for Americans and American goods cheaper for Japanese. This means that Americans will want to import less and export more. The BOP problem is corrected! ***All of this happens through the exchange rate and then prices affect imports and exports.

Why does the peg have a significant advantage over CBI in terms of transparency?

An exchange-rate target is a promise to which the government can be held accountable. -When the government adopts policies that are inconsistent with the peg, there is a visible result: the currency collapses.

What is an example of an intangible asset/horizontal integration situation?

An individual owns an intangible asset that can bring more revenue to a company. By opening more production sites, it realizes the full value of its intangible asset without having to try to sell it in an open market.

What is the IMF?

An international organization to monitor countries' macroeconomic policies and balance of payment positions. -It works by helping helps countries decide when to devalue their currency and grants access to the stabilization fund (country must be facing fund. disequilibrium)

What is an intermediate good? Example?

An output of one production process that serves as an input to another production process. -Standard oil owned oil wells and the refineries; this meant that each stage of the production process was contained within a single corporate structure.

How is globalization BAD for the environment?

As economic activity expands, resource use and waste increases. Consumption patterns also change as incomes rise. (more cars vs bicycles, more to-go containers) If a country's comparative advantage is a dirty industry, they'll do more of this. (ex: lots of shrimps leads to shrimp farming which leads to pollution of water supply)

Who has the most bargaining power in NR investments?

At first, the MNC has the most bargaining power because it usually has a monopoly over capital, techniques, and technology required to extract and refine. Furthermore, it can choose where to invest because no country has a monopoly over NRs. However, over time, the power shifts to the host country in what is called the "obelescing bargain",

What is the best example of horizontally-integrated MNCs?

Auto producers. Ford produces the same cars in both Europe and the US.

Summary of BOP adjustments.

BOP adjustments occur as prices FALL in the country with the DEFICIT and RISE in the country with the SURPLUS. Consumers respond to these prices by buying more of the cheaper goods and less of the now more expensive goods. This changes imports and exports which in turn removes the BOP imbalance!

Why is it in the best interest of the government to be dishonest in terms of inflation policy?

Because if it declares that it will maintain price stability (low inflation), workers will set their nominal wages accordingly; once the wages are set, the government can achieve lower unemployment by increases inflation (because of the reduction in real wages that occurs). ...AND raising employment means greater popularity for the government and re-election!

Why are there no comprehensive international rules governing foreign direct investment?

Because of the conflict between capital-exporting and capital-importing countries (developed and developing). Developing countries want international rules allowing them to control MNC activities in host countries and developed want ones that will protect foreign investment by limiting host-country regulation.

How do specific assets create incentives for vertical integration?

Because of the difficulty in writing and enforcing long-term contracts. Opportunistic behavior can take place once an investment has been made meaning one party can extract a bigger share of value from the investment. -Vertical integration ELIMINATES the problems resulting from specific assets...If the shipowner owned the RR, there would be no issue!

Why did the US become a debtor country in the 2000s after being a surplus one following the Paris Accord adjustments early in the previous decade? What is so alarming about this reason?

Borrowing skyrocketed. The Fed kept IRs so low that they were "negative" (below inflation...went against Taylor's rule), and most of said borrowing was done by the US government ***The fact that most of America's foreign borrowing was going straight to the government and private households meant that it wasn't increasing production

What country serves as an example of an exception to practice of riding the boom wave?

Brazil

How did governments attempt to solve the dollar overhang problem? What was the issue?

By creating a new reserve asset known as the "Special Drawing Rights" (SDR). BUT the system was already moving towards demise.

How did the Bush administration decide to deal with the global imbalance of the 2000s?

By embracing a bargaining process that sought to realign currencies and alter macroeconomic policy to encourage gradual adjustment. This effort resembles the Plaza Accord of the 80s.

How would the Fed weaken the dollar? What is the risk in doing this?

By increasing the supply of the dollar by lowering interest rates. -This might lead to inflation.

What do veto players achieve?

By limiting fiscal autonomy, they can heighten the importance of monetary authority and provide incentives for flexible exchange rates.

What is another benefit of fixing the exchange rate? (Hint: related to international trade)

By stabilizing the rate, the government encourages greater trade and investment. Fixing the rate to a low-inflation country has proven to promote both of these.

How might individuals feel the burden of their actions?

By taxing pollution (AKA assigning property rights) -This is hard because it requires good institutions

What are the costs of lower inflation (like that provided by central banks)?

Countries with more independent central banks expect lower rates of economic growth and higher rates of unemployment.

In a floating rate system, what is meant by private actors determining the value of a currency?

If private demand for the currency falls, that currency depreciates (and vise versa).

How were price flows driven in the gold system?

By the autonomous "price specie-flow mechanism". For example, if the US had a sudden economic growth, there were suddenly more goods to buy (since the US was selling more). But, because its money supply was fixed to gold, downward price pressure would cause US exports to rise and imports to fall, resulting in a BOP surplus. -This surplus pulled money in from the world which in turn made US prices return to their initial levels. -***Thus, the gold system caused periods of inflation and deflation. This is common with fixed rates.

How is the unemployment rate determined in the short-term?

By wage agreements between businesses and unions. -These entail fixed (unchanging) nominal wages for a particular period of time (like contracts do). This period is usually 2 to 3 years.

How do CBI and pegs differ in terms of transparency?

CBI is difficult to monitor as a commitment tool, whereas a peg is more transparent.

Who did businesses and political elite in the US blame for the global imbalance of the 2000s?

China; they claimed that China had engaged in currency manipulation by intentionally undervaluing its currency against the US dollar (in its peg). They said that China's actions represented an unfair trade practice.

What was the biggest implementation problem with the decision to enact fiscal policies on the side of both surplus and deficit countries following the Paris Accord in 1985? Explain with a couple brief examples.

DOMESTIC POLITICS -In the US, there was conflict over HOW to reduce the deficit; democrats wanted to see a cut in military spending and increased taxes; republicans wanted a reduction in social welfare programs -In Germany, people were reluctant to take measures to reduce their surplus out of fear that inflation would result

How do institutional differences affect the choice between banks or rates?

Democracies use independent banks more frequently because any manipulation will be seen by voters and the free press. Dictatorships use fixed rates since they find it hard to convince people that they aren't manipulating the exchange rate.

What is the specific argument of the partisan model?

Different political parties pursue different macroeconomic objectives -It's based on the Phillips curve which suggests a trade-off between inflation and UE...To reduce UE, inflation must occur more rapidly and vise versa

Why do firms vertically integrate?

Due to SPECIFIC ASSETS

What are the 2 decisions faced by politicians making currency policy?

REGIME (fixed or floating) and LEVEL (strong or weak currency)

In the 1980s, bargaining power in FDI shifted back to developed countries.

During the Uruguay Round, the U.S. got trade-related investment measures back on the agenda. These are government policies towards FDI that impact a country's exports or imports. The U.S. wanted to limit the ability of host countries to use these measures which usually came in the form of trade-balancing and domestic-content requirements. A limited agreement was eventually reached.

Why did the EMS work?

EU governments at the time put high value on stable exchange rates rather than on domestic objectives.

Why did the EMS start to have problems in terms of consensus?

EU governments became less satisfied with giving up domestic autonomy once inflation came down. -They began to argue that if Germany's central bank was going to continue to set monetary policy thoughout Europe, then they should have a say. ****this argument was parallel to that of France and Germany in regard to the US during BW system

Who arose as a new defining state in the global imbalance of the 2000s?

East Asian countries, specifically China. They were now surplus countries. China emerged as the largest supplier of credit to the US.

Only since the 1920s have we seen governments elect domestic economic autonomy over exchange-rate stability. Why is this the case? What happened?

Electoral systems throughout Western Europe after WW1 changed the balance of power in domestic politics as universal male suffrage was offered to all of Western Europe. -This meant that working-class interests gained a voice in parliaments. -These workers cared about employment opportunities and wages which meant that there were now incentives for governments to raise employment and keep wages high; this could only be done by moving away from a fixed system Also, the appearance of Keynes's rationale regarding monetary policy for management of the domestic economy had an impact.

What are other ways to reduce the trade deficit (since weakening the dollar doesn't seem to work)?

Encouraging Americans to save more and companies to invest more.

How are MNCs at the center of globalization? Think trade.

Falling trade barriers and improvements in communications technology have made it easier for companies to internationalize their activities

Who can rise the economy-wide real wage? What is the effect of raising this wage?

INSTITUTIONS- like labor unions. -There is a reduced demand for labor (because it's more expensive), so unemployment goes up.

What does it mean that the current and capital accounts are mirror images?

If a country has a current-account deficit, it must have a capital-account surplus and vise versa.

Why has income inequality increased in the US?

Financial deregulation has benefited the corporate elite who keep getting richer as they can shift capital to countries with lower taxes. They also pay less redistibutive taxes at home. -Also, technological progress has helped skilled workers over unskilled ones. It favors corporate managers.

What are the two types of exchange rate systems?

Fixed and floating ***Remember, a variety of exchange rate systems can exist at the same time in the international system

For which countries is a floating system best?

For advanced countries because they don't want to lose domestic economic autonomy (in terms of making decisions about the economy back home).

For which countries is a fixed system best?

For less developed countries that don't have the ability to control things at home.

What is FDI?

Foreign direct investment; it occurs when a firm based in one country builds a new plant/factory (or purchases one) in a second country; thus, a national corporation (company) becomes an MNC by making FDI!

What was the lending system like that characterized the global financial crisis of the 2000s?

Foreign lending to individual Americans was indirect (via a complex system) -the ultimate borrowers of foreign credit (American homeowners and credit card holders) had no idea they were borrowing from foreigners

Explain the conflict that took place between the US and France in light of dollar overhang under the BW system.

France argued that the US was running an imperialistic policy by maintaining a large deficit that other countries couldn't support. It called for a move away from the dollar's role in the system.

How has globalization affected the number of people living in poverty?

From 1980 to 2008, the absolute number of people living in absolute poverty fell by 500 million -poverty has fallen most in countries that have grown the fastest (via participation in global economy); this means growth is good for poor -BUT people living in extreme poverty still high

The inability to effectively make the changes (adjustments) necessary (as entailed in the Paris Accord) resulted in what in the 1980s? Give a specific example of a positive outcome.

GLOBAL FINANCIAL TURMOIL...which finally made governments act! -Raegan agreed to accept any proposed budget-correcting legislation developed by Congress. This led to the "Gramm-Rudman-Hollings Act" (which put the US on a deficit-reduction path)

The inability of governments to counter price movements under the gold system meant what when a country had an external surplus?

Gold had to be accumulated. Governments were expected to lower the discount rate to expand credit and boost investment. Lower interest rates strengthened inflationary pressure of gold inflows.

Give an explanation of how a government under a fixed system gets involved due to misalignment. (Yen and dollars)

If money is fixed below the price against yen (meaning the dollar is worth less than it should be), the US will sell yen from the foreign exchange reserve and purchase dollars; this will reduce the supply of dollars in the foreign exchange market (because they're buying them and bringing them home) and thus cause the dollar's value to rise (because there are now less of them). The opposite also holds.

Describe the trade-off for governments when it comes to exchange rates.

Governments must choose between a stable fixed exchange rate and stable domestic prices. If they want a stable fixed exchange rate, they must accept deflation and inflation from the BOP adjustment.

What is the cost of fixing the exchange rate?

Greater economic integration means sacrificing the ability to run an independent monetary policy. Only a FLOATING rate allows for independent monetary policy.

What was the biggest thing that Americans were borrowing for?

HOUSES! -This meant the growth of the housing market and HUGE increases in housing prices; there was an ASSET BUBBLE

According to Keynes, getting stuck at high unemployment was the result of what?

He said it was because of the fragility of investment decisions which result from firms' expectations about the future demand for their products. -An economic shock causes demand to collapse and unemployment to increase thereby making firms not want to make new investments. This means unemployment remains high and demand is inadequate for goods.

What solution did Keynes offer to generate aggregate demand?

He said the government could use fiscal and monetary policy to manage aggregate demand.

What were the specifics of the collapse of real estate prices in 2007-2008 (think securities and security-holders)?

Home prices fell making the MARKET VALUE of the securities issued to purchase real estate fall as well. This meant that financial institutions that held these securities suffered great losses. They had borrowed money to purchase these securities which meant an effect on the ENTIRE FINANCIAL SYSTEM.

How did consumer spending increase alongside of the increases in housing prices?

Homeowners could essentially borrow against their homes which allowed for consumption elsewhere (new cars, vacations, etc.)

How is the greater bargaining power of MNCs demonstrated in manufacturing investments?

Host countries have become increasingly more likely to offer MNCs "locational incentives".

Give an example of BOP adjustment under a fixed system (US and Japan).

If the US has a current-account deficit (more imports than exports), under a fixed system, the government will intervene to halt depreciation. It will take dollars OUT of the market by buying dollars in exchange for the yen (since there are too many out there) to eliminate the imbalance. -This intervention changes each country's money supply; the US money supply falls and the Japanese increases. As a result, prices are altered in both countries. -A reduced money supply in the US means lower prices. Expansion of money supply in Japan means higher prices there. (US goods relatively cheaper than Japanese AND US imports fall and its exports go up. Opposite for Japan.)

What are the positive FISCAL effects of immigration?

Immigrants are often young and employed, so they could contribute to welfare and pension programs. Also, they may contribute to social security but never collect it because they return home when they are older.

What are the negative FISCAL effects of immigration?

Immigrants mainly participate in the INFORMAL sector (like babysitting!) so there is no tax collection, yet they end up making big claims on welfare.

How were Keynes's claims subsequently seen in US policy?

In 1945, Congress considered "The Full Employment Act" by which the government was to be responsible for maintaining full employment. -This was eventually passed in essence by a later policy known as the "Employment Act"

How do "high audience costs" relate to the credibility of CBI?

In democracies, these costs result from the fact that the domestic audience can punish the leaders who do not follow through with their commitments in elections. -ALSO...other banks are powerful low-inflation constituencies. They support the central bank when its independence is threatened.

In what industries do we see little MNC activity? Example?

In industries where locational advantages exist but not intangible or specific assets -Retail! It engages in contractual relationships with independent firms

What happened to the financial sector during the housing boom?

Increased financial activity made it BIGGER. The earnings of people in finance soared alongside of housing and stock prices. They were being overpaid

Why does the global economy need a common monetary standard? What must this standard be (3 things)?

Individuals and companies need a generally accepted unit of exchange. -It must be a predictable measure, something that allows transactions to be carried out, and something that enables value/wealth to be stored

What is vertical integration?

Instances in which firms internalize their transactions for INTERMEDIATE GOODS.

Why do intangible assets give rise to horizontally-integrated firms?

Intangible assets are difficult to sell to other firms at a price representing their true value. -Owners of knowledge-based assets confront the "fundamental paradox of information" (the value of the information for the purchaser isnt known until he has the information, but by then he has acquired it without cost)

Explain how there are winners and losers associated with both stability and level of exchange rate.

Interest groups heavily involved in global commerce/investment will prefer a fixed exchange rate, whereas domestic groups will prefer floating. Consumers and producers in nontradables desire a strong (appreciated) currency than do producers of tradables.

Under a floating system, what stays stable and what is changed in BOP adjustment?

Internal prices stay stable, and the exchange rate is changed to change prices.

How were real estate prices increased in the US?

Investment in residential real estate as a share of GDP increased.

What are specific assets? Example?

Investments dedicated to a particular long-term economic relationship. -A shipowner needs the owner of a railroad to build a rail spur to transport the goods he delivers to the dock to the market. The RAIL SPUR is an asset SPECIFIC to the ongoing relationship between the shipowner and the RR owner

What are natural resource investments?

Investments that result from large deposits of a particular natural resource in a foreign country -This is why the US has invested so heavily in the Middle East (oil)

What are efficiency-oriented investments?

Investments that result from the availability of lower-cost factors of production required for a specific product -Here we see different firms allocate different parts of the production process to different parts of the world -Based on the abundance of countries/FACTOR ENDOWMENTS!

What are market-oriented investments?

Investments that result from the presence of large consumer markets that are expected to grow rapidly over time -Firms want to sell their products where there is GROWING DEMAND! -Firms are able to JUMP over trade barriers by being able to produce in the local market

What are the advantages of a soft peg?

It acts as a NOMINAL price target that can help resolve inflationary expectations. It also allows for a limited degree of monetary policy flexibility to deal with shocks.

How does fiscal policy affect aggregate demand (and employment as a result)?

It affects it DIRECTLY. -Government expenditures make for increased demand of goods and services. -The additional goods being demanded causes firms to hire more workers to make them.

How does monetary policy affect aggregate demand?

It affects it INDIRECTLY by changing interest rates. -An increase in the money supply will make it cheaper to borrow which increases the desire (demand) for investment-related expenditures like new homes and cars (those things financed with credit)

Explain how the WTO is actually not anti-environment.

It allows countries to enact environmental measures even if they affect trade provided they don't discriminate. Examples: *Turtle-shrimp case: The US told countries that they wouldn't import shrimp from countries if they didnt use the proper technology to protect sea turtles being caught. WTO sided with the US. *Hormone-Fed beef case: WTO ruled against an EU ban on behalf of growth hormones. Said that the EU had to prove health concerns with scientific studies.

When capital flowed into the US in the 1980s, what happened to the dollar?

It appreciated.

What is specifically argued by the electoral model?

It assumes that governments care most about monetary policy autonomy and that they will maintain a fixed exchange rate ONLY when the monetary policy required to do so corresponds with domestic economic objectives which are shaped by the need to win elections. -Also suggests politicians may be more likely to adopt expansionary macroeconomic policies in the 18 months prior to election to create strong economic growth and falling UE at the time of election

What did the U.S.' spending result in? (a new status)

It became a "net international creditor country": a country in which foreign assets owned by local residents exceed the total value of domestic assets owned by foreigners.

What is wrong with having a strong dollar (think foreigners)?

It means that the US is buying more than it's selling, so it has a trade deficit. It also means that foreigners own US liabilities, and they can redeem these liabilities for US-made goods and services. -Essentially, it means we are consuming now at the expense of the future.

What must a government do if it is determined to use monetary policy to keep unemployment low?

It must CONTINUALLY increase the rate of inflation. -It will face the trade-off between unemployment and inflation MUCH MORE OFTEN!

BOP adjustments are performed differently in fixed and floating systems. How is it done in a fixed system?

It occurs through CHANGES IN DOMESTIC PRICES caused by government manipulation of the money supply!

How did the U.S. attract large capital flows (investment) from surplus countries in the 1980s?

It promised greater return on investment via pretty high interest rates. As the U.S. current-account deficit widened, IRs went up in the U.S.

How is the liberal international order not just economic? How is it playing out today?

It promotes the idea that economic growth would lead to the spread of democracy. Today, the system's leading powers face political and economic uncertainty, and people are blaming globalization (say it's caused inequality, increase in nativism, say it's eliminating jobs and lowering wages)

What are the advantages of a fixed exchange rate?

It provides for sound fiscal and structural policy, low inflation, and an overall higher degree of price certainty.

Why is inflation bad?

It raises uncertainty among firms and unions which can reduce investment and economic growth rates. Less investment and economic growth can raise the natural rate of unemployment.

Why was Germany hesitant to join the EMU? What was the regional solution to this hesitancy?

It saw the possibility that it would have to intervene on behalf of other EU governments. -Other countries included Germany by pegging to the Bundesbank.

How does the state-centered approach refute the Keynesian model?

It says that no such trade-off between inflation and UE exists; instead, there's only a short-term trade-off. The government cannot use monetary policy to reduce unemployment for an extended period without generating even higher rates of inflation.

Why did China stop pegging to the US dollar? When did it do this? What did it opt for instead?

It stopped because the US Fed was expected to increase interest rates that would end up raising the value of the dollar even higher. This would raise the yuan, challenging its exports. -It did this in 2015 -It opted for pegging to a basket because this gives it more monetary flexibility.

How does granting the central bank independence solve the time-consistency problem?

It takes monetary policy out of politicians' hands. -Central banks can make credible commitments because they're insulated from short-term goals.

How did the Bretton Woods system function?

It was based on the US dollar tied to gold at $35 per ounce. Western currencies were tied to the dollar much like the pound sterling after 1914.

What happened to the US current-account position that was finally achieved in the early 1990s?

It was reversed by the end of the decade. -The world saw a repeat of the 1980s' global imbalance in many ways; the US deficit was contrasted by surpluses in Japan and Germany (yet again)

What was the "UN Resolution on Permanent Sovereignty over NRs"?

It was the 1962 resolution that affirmed the right of host country governments to expropriate foreign investments and to determine the appropriate compensation in the event of expropriation.

What was the Plaza Accord? Why was it significant?

It was the agreement made at the Plaza Hotel in NYC in 1985 between the G5 finance ministers (Germany, US, Japan, France, Britain) to intervene in the foreign exchange markets whenever it appeared that the market was pushing the dollar up. It was the SOLUTION to the 1980s debt crisis in the US.

The gold system is also known as the "gold sterling standard". Why is it also called this? The idea that British banks dominated the world (AKA PAX BRITANNICA) was challenged when? What happened then?

It wasn't actually gold. The British pound sterling, backed by a strong government, was thought to be as good as gold. -The success of the system ended in 1914 when it crashed due to political rivalries. -The center shifted from London to New York as the monetary system was changed.

How do governments have time-inconsistent monetary preferences?

It's in the government's best interest to convince wage bargainers that it's committed to low inflation but then, once workers make their wage agreements free from inflation expectations, the government has an incentive to expand the money supply (increase inflation) in order to reduce unemployment.

What is the international monetary system?

It's the "Great Wheel" that enables goods to move across borders. It provides the measure to conduct world trade and payments.

What does transparency mean in the context of the chapter?

It's the ease with which the public can monitor the government.

What is the international financial system?

It's the grease that allows the wheels to turn. It allows trade and payments to function.

Why is the refugee crisis in Myanmar especially tragic?

It's the world's fastest-growing. More than 500,000 muslims have fled for Bangladesh due to a campaign of violence by Myanmar's military; there are signs of ethnic cleansing.

What are speculative attacks?

Large currency SALES sparked by the anticipation of devaluation. -These started to take place due to dollar overhang. Countries expected the dollar to lose value to save the BW system. This didn't happen, however. Nixon stopped the convertibility of the dollar into gold.

What is the greatest weakness of the partisan approach?

The assumptions are too sharp. Not ALL leftist governments pursue expansion (and thus want floating rates) and not ALL rightest parties want fixed exchange rates.

From where did the greatest opposition to the 4 international principles of FDI come?

Latin American countries; they invoked the Calvo doctrine. It argued that no government has the right to intervene in another country to enforce its citizens' private claims.

Explain the long-term effect of unexpected decreases in inflation.

Less employment due to higher real wages causes workers to compete for the few jobs out there. Workers become more willing to work for lower wages, so real wages fall again. These lower wages push unemployment back to the natural rate.

Why do MNCs opt out of the market-based approach?

Locational advantages and market imperfections

What are some objectionable workplace practices?

Long working hours, abusive environments, toxic chemicals, health hazards, sexual harassment, child labor

How have poverty changes been uneven?

Mainly have taken place in Southeast Asia -Half of extreme poor are in subsaharan Africa

What do manufacturing sectors prefer when it comes to regime? What about countries with inflationary tendencies?

Manufacturing sectors prefer a more flexible currency (floating) so that they can keep their locally-produced items competitive. -Inflationary tendencies prompt countries to adopt fixed exchange rates

How was interrupting the 2000s boom a threat of a bigger bust?

Many of the newly written mortgages were made to borrowers who could barely service them. They only expected to be able to as their housing pries went up.

Under the gold system, monetary policy responded to... What did this lead to? What were governments essentially sacrificing?

Monetary policy responded to the balance of payments surplus or deficit. -This lead to a lot of DOMESTIC price instability. -Governments were sacrificing internal price stability for exchange rate stability ***TRADE OFF.

What are remittances?

Money that migrants send home. They now represent the largest source of foreign income for many developing countries. -They are more evenly distributed among developing countries than capital flows, whereas FDI mostly goes to big emerging markets.

What is the difficulty when it comes to remittances?

Most governments don't have the authority to limit them. They are rarely taxed and provide benefits to the host. Also, analysis of them is hard since there is little ability to track them.

Who carries out monetary policy in the US?

The Federal Open Market Committee -It reviews economic conditions and uses economic indicators to establish interest rate targets to keep the economy in balance. -It then raises interest rates to reduce inflation or decreases them to spur economic growth

How did Keynes's findings in the 1930s challenge neoclassical economic theory?

Neoclassical theory held that high UE shouldnt persist because labor, in high supply during times of UE, would eventually see greater demand again after the price for their labor (wages) fell. This wasn't taking place. -He challenged this assumption in 2 ways: 1. Said neoclassical economics were wrong for saying the economy would always return to full employment; said economy could get stuck at an equilibrium of underutilized production capacity and high UE. 2. Said that governments could restore employment by using macroeconomic policy.

Why did the Bush adm allow the boom to continue?

No government likes to put the breaks on a booming economy. There were powerful interests at stake. -Politicians like to take credit when the economy is growing. -Debt fosters growth. -There is always the idea that a recession now or later is still a recession; let it happen under a different government's watch (this is known as "rational procrastination")

What effect does a borrowing boom have on tradables and nontradables? How does this effect then play out on individuals?

Nontradables (like financial services, insurance, and real estate) increase in price during a borrowing boom. -This is good for people who work for these industries and own nontradables (like houses) but bad for producers of TRADABLE goods because of the rise in other prices (and increase in imports that's simultaneously taking place

How can a FLOATING exchange rate be used as a policy tool?

Politicians can adjust the exchange rate to affect the competitiveness of the tradable goods sector.

Explain why housing and financial markets kept rising despite the alarm bells in the 2000s.

Powerful interests had a stake in keeping them going up. -bankers, homebuilders, construction industry, realtors...all benefited Also, there were electoral considerations -many of the states benefiting most directly from the boom were politically important (FL, CO, AZ, NV)

What are time-consistency problems?

Problems that arise when the best course of action at a particular moment differs from the best course of action in general. -THINK OF FINAL EXAM ANALOGY

What were credit-default swaps?*

Promises to repay loans if the original borrowers did not. It sheltered investors from the risk of default in one area of the country. The problem was that it did not plan for the entire market to crash.

What did the deficit in the US eventually lead to in terms of domestic politics?

Protectionist pressure

What does dollar strength refer to?

Purchasing power -A strong dollar helps residents buy more things from abroad and helps consumers who have more purchasing power. Businesses benefit because they have lower production costs. Exporters are hurt because they can't compete. -A weaker dollar helps exporters because it boosts their output.

What are the POSITIVE labor effects of immigration?

Receiving states get aggregate gains. The influx of immigrants increases the economy's labor supply and thus productivity. This leads to rise in the national income (known as "immigration surplus") and thus more purchasing power!

Explain why economic development isn't enough for improving the environment.

Regulation is also needed. People with more income can pay to lobby government so that there are people in power to protect the environment. Democracies essentially translate this popular will into action. -There must be a cost-benefit analysis about trade and the environmental trade-off

Does weakening the dollar help to lower the trade deficit?

Research says that it doesn't since US exporters are also importers. A weak dollar helps them sell abroad but also raises their costs since they import many components.

How did countries respond to the Bush adm's international proposal?

Surplus countries didn't want to adjust. They blamed the US' own budget deficit which had resulted from Bush's 2001 tax cuts.

What are some equivalents of the ECB?

The Federal Reserve in the US, Bank of Japan, Bank of England

What is desertification?

The process by which human activity towards the environment such as urbanization, climate change, over-grazing, etc., is stripping land of minerals. -This can lead to social instability and political conflict (environmental refugees....international insecurity)

What regulations have been the most effective?

Taxes on energy (e.g. more expensive gas)

Over the 1990s, the Fed kept monetary policy in line with "Taylor's rule". What is this rule and how was it seen in the context of the 2000s?

Taylor's rule refers to adjusting interest rates in line with changes in the inflation rate and the rate of economic growth. This is how banks achieve price stability, low UE, and policy credibility. -After the 2001 tax cuts, Greespan (the Fed chairman at the time) oddly brought IRs down significantly; he possibly had an incentive to get Bush reelected in 2004

What is assumed by both the institutional and partisan models?

That ALL governments want to retain monetary policy autonomy to manage the domestic economy

What is Broz's argument?

That INSTITUTIONAL DIFFERENCES help explain why governments choose either independent central banks or fixed exchange rates when seeking a credible commitment to price stability. ****Says that the degree of transparency of the monetary commitment tool is INVERSELY RELATED to the degree of transparency of the political system.

What is assumed by just the sector model?

That exchange-rate policy is determined by competition between sector-based interest groups.

The society-centered approach to monetary and exchange-rate policies: What does this approach argue?

That the monetary and exchange-rate policies of a government result from interest-group demands. -It's based on the recognition that monetary policy and exchange-rate movements have distributional consequences and that these consequences result in winners and losers who then turn to politics to advance their economic interests. -The political institutions in place determines how competition between these groups will play out

What does the S-S Model suggest about immigration?

That, since the open flow of people, goods, and capital benefits the abundant factor and hurts the scarce factor of production, then all open policies should come together (trade and migration); however, trade and immigration policy often work in opposite directions.

What exchange-rate system emerged as a result of similar low inflation objectives in Europe? Explain it.

The "European Monetary System" (EMS) (in 1979). This was a fixed-but-adjustable system in which governments established a central parity on a BASKET of EU currencies called the European Currency Unit (ECU).

The complaints of countries about Germany's control over monetary policy resulted in what?

The "Single European Act"- this called for "monetary union" because its was believed that gains from a single market could only be realized by a single currency.

What is the main idea of the 2000s period according to Oatley?

The 2000s brought large current-account imbalances (LARGER than the 80s) as governments pursued different macroeconomic policies.

What did pegging to the Bundesbank mean?

The EU would reflect the inflation rates in Germany.

The failure of the EMS/peg to the German bank led to the establishment of what in Europe? Give details.

The EU's central bank, "the ECB", in 1999. -Countries that participate in the ECB no longer have national monetary policies. They are required to grant their own national central banks independence from politics. -Also, laws prohibit the central governments of members from influencing the vote of their respective central-bank governors in the ECB.

What was the greatest source of disagreement among EU countries regarding the common currency? Why has this been problematic?

The European Central Bank refused to actively encourage euro depreciation. -This refusal has caused heated conflict in recent years as debt problems have occurred in Mediterranean countries (for reasons similar to US crisis, bubbles popping)

How did Nixon's macroeconomic policy play out? Details.

The Fed increased the money supply and government spending was increased. -The problem was that this boosted domestic demand resulted in a trade deficit; this current-account imbalance provoked gold outflows -The Nixon admin was left with a choice between domestic economic expansion and the dollar's fixed exchange rate.

What are the general predictions from political parties regarding immigration?

The LEFT usually promotes open immigration: they try to protect local workers who lose jobs, but they are also interested in protecting the rights of migrants (this cultural aspect wins!) -The RIGHT usually promotes stricter immigration: they see the business benefits of immigration but are often grassroots and respond to anti-immigration pressures (thus cultural aspect wins again!)

Who has the most bargaining power in low-skilled labor-intensive manufacturing investments?

The MNC has the most power CONSTANTLY because no one host country has a monopoly over low-skilled labor (meaning it can choose where to invest). Also, these investments arent susceptible to the obsolescing bargain because they can easily be moved out of the host country. Technology in manufacturing changes often, so it's not easily transferred to the host country.

What was the financial situation in the 1980s?

The Raegan adm cut taxes and increased military spending which resulted in a bigger budget and increased imports. Germany and Japan took on RESTRICTIVE monetary policies that led to current account surpluses.

Give an example of a dependent central bank.

The Reserve Bank of Australia. -The Secretary of Treasury has the final say on monetary-policy decisions, and a government official has a vote on the reserve board.

What is aggregate demand?

The SUM of all consumption and investment expenditures made by the government, domestic and foreign consumers, and producers.

Give an example of a highly independent central bank.

The Swiss National Bank. -The Swiss government cannot influence its monetary policy. It's completely unattached.

What does a current-account surplus mean?

The US is able to spend more than it actually earned because the rest of the world lends to US residents. The surplus reflects the willingness of other residents to finance US expenditures.

Explain the dollar glut that ultimately threatened the stability of the BW system.

The US maintained a large BOP deficit due to Vietnam, welfare, and Johnson's refusal to increase taxes. The US adopted expansionary macroeconomic policy; it was sucking in imports which sent dollars abroad. Eventually, there were more claims on US gold than US dollar holdings. This was known as "DOLLAR OVERHANG"

What was the Louvre Accord?

The agreement between governments to end the period of realignment that they'd began under the Paris Accord. They instead chose to move towards a more institutionalized exchange-rate cooperation.

What are reserve requirements?

The amount of funds banks must hold against deposits in bank accounts. If a bank lowers these, banks can loan more money, and if banks loan more money, there is a greater supply of money in the economy.

What is the liberal international order?

The belief in open markets, democracy, and individual human rights and that institutions would spread these ideals. -Has been the uniform stance of Western policymakers since WW2 -At the heart of the BW institutions

How can the money supply be increased?

The central bank can lower exchange rates or add credit to a nation's bank reserves.

What is the most important part of the state-centered approach?

The concept of the natural rate of unemployment.

The inability of governments to counter price movements under the gold system meant what when a country had an external deficit?

The country had to lose gold to raise the discount rate. -This restricted domestic credit which slowed down domestic investment. This tighter credit strengthened the deflationary pressures from gold outflows.

What ended up being the solution to the Greek debt crisis?

The creation of a joint EU-IMF emergency funding facility totaling 1 trillion dollars.

How might the creation of independent central banks impact the way that domestic politics shapes monetary and exchange-rate policy?

The creation of such might cause conflict between central banks and elected officials. This is because of... 1. Interest groups: They will exert pressure on whichever actor they believe is most likely to pursue their preferred policies 2. The fact that monetary policy is NOT PERFECTLY insulated from political influence; NATIONAL governments still have CONTROL OVER EXCHANGE-RATE policy; this can be used to force the central bank to pursue the preferred monetary policies of the government

What is central bank independence?

The degree to which the central bank can set monetary policy free from interference by the government.

What happened within two years of the Plaza Accord?

The dollar's value had fallen by 40%. Now governments had to act to prevent any further depreciation and did so via the Louvre Accord.

What determines the natural rate of unemployment?

The economy-wide real wage. This is the wage at which workers who want to work can actually find employment.

What is captured by the concept of "real exchange rate"? What is the real exchange rate?

The effects of borrowing on currency and the relative prices of tradables and nontradables. -The combination of the nominal exchange rate (a currency's value in terms of another) and the relationship between prices at home and abroad

What is dollar overhang?

The event that took place under the BW system when there were too many claims on US gold but not enough dollars to back them up. This threatened the BW system due to the loss in confidence in the dollar as the primary reserve asset and resulted in political conflict.

Under a fixed system, what stays stable and what is changed in BOP adjustment?

The exchange rate stays stable and the money supply is changed to change prices.

What systems are known as "in-between exchange rate systems"?

The fixed-but-adjustable exchange rate system and the managed float system

What are the social welfare consequences of the time-inconsistent monetary policy preferences of governments?

The government is forced to choose between 2 suboptimal monetary-policy responses. Following a commitment to low inflation, a government must 1. refuse to expand the money supply (maintain low inflation) which will cause real wages to go up and unemployment to go up too 2. go back on its promise and expand the money supply, delivering the inflation that labor anticipated but nobody really wants

What were the more exact implications of Keynes's argument?

The government, by spending when others would not or by increasing the money supply to induce others to spend, the government could increase demand in the economy.

What is the acceleration principle?

The idea that if a government does try to keep unemployment low for too long, it will have to keep increasing the rate of inflation. This is why the long-run Phillip's curve is vertical. There is no trade-off between UE and inflation due to the natural rate of UE.

What is RACE TO THE BOTTOM?

The idea that the world's governments maintain different regulatory standards (in terms of labor laws, pollution, business practices, etc.) because regulations affect production costs and that this reality may result in "regulatory arbitrage". -= the move from more stringent to more lax regulatory environments -Over time, regulation will be set on lowest regulatory practices. -AKA the "Darwinian struggle for capital" (survival of the fittest means giving up other values) -This has been expressed as a fear of workers' unions, environmentalists, and consumer groups (in opposition to MAI, WTO, NAFTA)

In autocracies, why is the costly trade-off between flexibility and price stability important?

The knowledge of this cost is exactly what gives the commitment (pegging) credibility.

What is the foreign exchange market?

The market where the world's currencies are traded. In reality, this is a big computer.

What is fiscal policy?

The means by which a government adjusts its spending and tax rates to monitor a nation's economy.

What is migration?

The movement of people across national borders

Define "Special Drawing Rights".

The new reserve asset created in light of the dollar overhang problem plaguing the BW system. It acts as a source of liquidity and is managed by the IMF and not backed by any standard. It's allocated to member governments based on the size of their quotas.

What is the exchange rate? How is it determined? How is it changed?

The price of one currency in terms of another. -It's determined by the interaction between supply and demand of currencies in the foreign exchange market -Imbalances between the supply and demand for currencies in the foreign exchange market cause it to change (e.g. if more people want dollar than sell them, the dollar gains value (appreciates)

What is the difference between tradable and nontradable goods?

The prices of tradables don't vary much from country to country, whereas nontradables must be consumed where they are produced (hair cuts, taxi rides, services of many kinds). ***Think about how cars are expensive everywhere but taxis are so much cheaper in Peru!

What was the most infamous example of a government sacrificing a fixed exchange rate to electoral politics?

The second Nixon election: With the election in mind, Nixon ended the convertibility of the dollar into gold in 1971. -UE has started to increase due to a recession -Nixon thought this might cost him the election, so reducing UE became the first objective of monetary policy (needed to expand)

What happens in the long-run in terms of unemployment despite monetary policies?

The short-term effects are reversed. -Labor market adjustments will push unemployment back to the NATURAL RATE.

What limits governments' ability to adjust macroeconomic policies to their benefit?

The specific institutional context -For example, politicians must win the approval of veto players. Each of the 50 states has their own ability to raise and lower taxes and maintain a budget

How did the Louvre Accord's solution play out?

The target zone idea failed to get popular support.

What gives CBI credibility?

The transparency of the political system.

What is a floating exchange-rate regime? Define and describe.

The value of the currency is determined by the market. -Central banks intervene by purchasing and selling foreign currency in exchange for local currency TO LIMIT short-term exchange-rate changes.

What are locational incentives?

There are 2 types: 1. Tax incentives 2. Direct foreign investments (usually offered by the developed countries to other developed countries)

Explain how the specific factors model relates back to migration.*

There are 3 factors: land, labor, and capital. Only 2 goods are produced from those factors, yet labor can be used for either since it's mobile. This generates political tensions.

What are the NEGATIVE labor effects of immigration?

There are distributional effects. Wages are distributed AWAY from native laborers to domestic laborers and capital owners. -Sucks for low-skilled native workers -Great or businesses that get cheaper and more labor

Explain how currency level is really a question of consumers or producers.

There is a trade-off between stimulating local tradables producers and raising local purchasing power. -The level of the exchange rate affects the relative price of traded goods for both local and foreign markets. Strong currency=great for residents cuz cheaper foreign goods but bad for tradable producers cuz lose competitiveness. Weak currency=bad for residents cuz more expensive foreign goods but good for local producers cuz less foreign competition.

What do empirics say about "Race to the bottom"?

There is no indication that more openness has forced a downgrading in labor or environmental conditions. Evidence actually suggests that openness improves worker standards. -MNCs pay workers better than average and have learned to work under rigorous regulations to gain a competitive advantage over locals -Also, MNCs dont just look at production costs when considering investments...also at market access. -MNCs are aware of public opinion and profit relationship

In light of the failed attempts to negotiate TRIMs in the Uruguay Round, what did developed countries do?

They tried for a MULTILATERAL AGREEMENT ON INVESTMENT (MAI) in the OECD in 1995. -They thought they had a better chance of negotiating among only developed countries since they did most FDI anyways. -This agreement was, in principle, like the MFN (governments couldn't discriminate against foreign firms in favor of domestic) -NOT successful due to disagreement

What are intangible assets? Examples?

Things whose value is derived from knowledge. -A patented process, design, or even "know-how" shared among firm employees

What is the managed float system?

This best describes out current international exchange-rate system. Governments intervene, but there are no official rules as to how they must do so. It's up to the government.

Describe the short-lived gold exchange system.

This emerged in 1914. Britain's economic might had come apart with the failure of the British pound sterling, and the US was isolationist at the time and thus unready to step up as the next financial leader. So, countries tied their currencies to gold without any national currency dominating international trade. -This allowed for some stability until 1924.

What is the Balance of Payments?

This is an accounting device that gives an aggregate picture of international transactions in a year.

Explain the Environmental Kuznet's Curve

This is an inverted U-shaped curve. At low income levels, environmental damage is limited. As societies begin to industrialize, environmental damage worsens (maybe they start using coal), and as societies transition to high income status, they can PAY to clean up the environment (AKA advanced industrialized countries).

What is the California effect?

This is another way of saying Race to the Top. It's the idea that the largest state sets the highest standards and then other states might adopt similar standards. The U.S. could play this role internationally.

Explain the fixed exchange rate system.

This is the exchange-rate system with TONS OF GOVERNMENT INTERVENTION! -Governments establish a fixed price for currencies in terms of an external standard (like gold); it could be pegged (like to US dollar) -The government maintains this fixed price by buying/selling money in the foreign exchange market (so via monetary policy); they can do so because of the pile of other currencies they possess as reserves -Essentially, they affect the amount out there so that the currency stays fixed.

What is brain drain and how is this positive?

This is the idea that allowing skilled emigration steals human capital from poor countries. -Actually, this can benefit both sides! -The potential for immigration leads to higher skill acquisition at home. -When an migrant from a poorer country becomes richer, it sends remittances back home. -There is also a spread in technology and ideas from the rich to poorer countries as a result! -Tourism is created. -Trade is indirectly spurred as these migrants consume the home country's goods.

What are negative externalities?

This is the idea that individuals lack incentives to restrain their negative behavior because the costs are borne by others. It relates to the Tragedy of the Commons. -The solution to negative externalities when it comes to the environment is to make pollution "internalized". This means making countries/individuals feel the burden of their actions.

What is the Porter Hypothesis?

This is the idea that tightening environmental regulations can stimulate innovation. There is not enough support for this argument. It would make more sense to say that regulation causes innovation than to include the environmental dimension. -HOWEVER, regulation CAN help with a "first-mover advantage" because it may incentivize new companies to come up with environ.-friendly goods that intrigue consumers!

What is a fixed rate? What is another name for this?

This is the legally-mandated use of another country's currency. This is often called a "hard peg". For instance, in Panama, there is "full dollarization". OR...it's a legal mandate requiring the CENTRAL bank to keep foreign assets at least equal to a local currency in circulation (This is done in Panama).

What is eco-dumping?

This is the process of paying other countries to take trash due to their comparatively lower environmental standards. The U.S. does this with China since China has more land for dumping.

What is a market imperfection?

This is what arises when firms are unable to profit from existing locational advantages unless they internalize the transaction

What are soft exchange rates? Define and describe. What countries have this type of peg?

This is when the currency maintains a STABLE VALUE against an ANCHOR currency or composite basket. The exchange rate can be pegged to the anchor with a narrow or wide range (plus or minus 30%). -At times, the peg moves up or down depending on differences in inflation rates. -Costa Rica and Hungary

How can pollution be a national externality?

This means that, for example, what we do in Cali affects Maine. -Government intervention is the only solution here

Why is it significant that by the late 1970s most EU governments believed that reducing inflation had to be their chief objective?

This meant that all governments were pursuing low inflation, so all could participate in a common exchange-rate system. POLICY OBJECTIVES HAD CONVERGED

Describe the classical gold standard.

This was the monetary system from 1820 to WW1. The major national currencies were tied to gold at a fixed rate. Prices in each country moved in response to cross-border gold flows. They rose as gold flowed in and fell as gold flowed out.

What is the result of the government's time-inconsistent monetary policy preferences on the masses (in general)?

Those involved in wage bargaining have little incentive to believe any inflation target that the government announces.

How do governments lower their currency's value?

Those with fixed rates just make an announcement. Those with flexible rates increase the money supply.

How did BW provide flexibility?

Through fixed-but-adjustable exchange rates -governments created a central parity for their currency against gold but could change the PRICE OF GOLD in the case of a "fundamental disequilibrium" (time of large imbalance)

What are positive externalities? Example?

When economic actors in the host country that are not directly involved in the transfer of technology from an MNC to a local firm also benefit from this transaction -A Motorola worker uses the knowledge it gained from Motorola to produce inputs for other Malaysian firms at a lower cost

What is "transfer pricing"?

When prices on inputs are set by an MNC in a host country so that they are able to manipulate them so that a profit is made for themselves.

What is the obsolescing bargain?

When the MNC cannot easily remove its investment in the host country's NRs. Its monopoly on technology goes down as indigenous workers are trained and uncertainty over the investment goes down if the investment proves successful. If the MNC leaves, it will face substantial costs.

Under the fixed system, when do governments get involved?

When the values (rates) get misaligned

Where do we expect to see MNCs? Under what circumstances?

Where BOTH locational advantages and market imperfections are present

What was the biggest debate in regard to the Greek crisis? What is Germany's position?

Who would bear the cost of adjustment -Germany didn't want to go easy on Greece out of fear that other indebted countries would expect the same treatment. Instead, it wanted harsh austerity in Greece in return for EU help

What was the problem with suddenly adopting price stability?

Workers and businesses were already used to preparing for bouts of inflation. -Still expecting high inflation, workers continued to demand high nominal wage increases -This made governments choose between delivering high inflation or allowing high unemployment.

What happens to the nominal wage in wage agreements if prices rise?

Workers lose purchasing power (their REAL wages go down). -They will then seek to protect their REAL wages by gauging their nominal demands off of inflation EXPECTATIONS.

The internal political conflicts that resulted from the gold system demonstrate that...

You cannot have a stable exchange rate AND maintain internal (domestic) autonomy...AKA price stability at home.

Broz's evidence shows that there is...

a slightly negative relationship between CBI and inflation in DEMOCRATIC settings

High inflation is NOT...

associated with BETTER economic performance.

Thus, Nixon devalued the dollar when...

expansionary economic policies didn't align well with the fixed rate

Countries with more central bank independence...

have seen lower rates of inflation.

Ideally, a monetary commitment should...

impose the constraint necessary to fix the time-consistency problem while leaving policymakers with enough flexibility to respond to economic shocks. -CBI achieves this relatively better because the low inflation credibility it offers does NOT come at the cost of forgone flexibility.

The greater the credibility problem,

the more likely that the government will choose fixed rates!

With more credit flows from abroad, US consumers...

were enjoying more imports. This caused the trade deficit to grow. -This was great for consumers who enjoyed cheap foreign goods in stores but detrimental to American manufacturers, especially those of labor-intensive goods that competed DIRECTLY with imports -These imports were paid for with FOREIGN MONEY