Econ 103 Quiz 4 stuff

Smoot-Hawley Tariff of 1930

The Smoot-Hawley Tariff Act of June 1930 raised U.S. tariffs to historically high levels. The original intention behind the legislation was to increase the protection afforded domestic farmers against foreign agricultural imports. Provoked Retaliation, shows Protectionism

Marshall Plan

Foreign Aid to European Countries (For WWII) Extremely successful Growth

Primary Effect

Affects Foreign Agent (Exchanging currencies) Can shift both Supply and Demand Curve Appreciation of $: Price of US good Increases US Export decreases, Imports Increases Depreciation of Pound: Price of UK good Decreases UK Export Increases, Imports decrease

Price Effect

Affects Production and shifts the supply curve Appreciation (Country A): Export Increases, Imports Decreases Depreciation (Country B): Exports Decrease, Imports Increases. Appreciation of $: UK firm Production costs increases, shifting supply curve UP Depreciation of UK Pound: US firm production cost descreases, supply curve shifts DOWN

"Beggar thy neighbor"

An international trading policy that utilizes currency devaluations and protective barriers to alleviate a nation's economic difficulties at the expense of other countries. While the policy may help repair an economic hardship in the nation, it will harm the country's trading partners, worsening its economic status. The policy name is derived from its resulting impact, making a beggar out of neighboring nations. The goal of a Beggar-Thy-Neighbor strategy is to increase the demand for your nation's exports, while reducing your reliance on imports. This is often executed by devaluing the nation's currency, which will make exports to other nations cheaper.

Marginal Propensity to Import (MPM)

Change in import expenditure/ Change in disposable income

Bretton Woods System

Created Three Institutions: IMF (International Monetary Fund): Stabilize exchange system relative to US $; can borrow up to 1.25x quota (If wanting to change value of currency, need their permission) WB (World Bank/International Bank for Reconstruction/Development): Ending poverty of poor countries GATT (World Trade Organization): Increase World Trade.

Pegged Exchange Rate System

Determined by Government (See TA Lecture notes)

Plaza Agreement of 1985

Devalue the dollar due to twin deficits (Trade and budget) and very high interest rates. Countries would take their US american money reserves to buy their own currency; causing demand for international money to increase, and price of international country money to increase.

Internal Equilibrium

Full employment without changes in inflation

Gold Standard

Each country declares parity with gold (i.e. 1 UK pound = 4 gr. gold) Additional Information: * Guarantees currency to gold * MV = PQ M is much smaller than GDP (Represented by Q)

Free (Float/Flexible) Exchange Rate System

Exchange Rate determined by market (Demand/supply of currency)

Foreign Agent

Exchanging Currencies (i.e. supply/demand curve)

Trade Surplus (Country A example)

Gold Inflow, Increases Money Supply, Inflation, Interest Rate decreases, More investment, GDP increases (Boom), hence Imports Increasing.

Gold Standard in Surplus Countries

Gold flows in Money supply increases Inflation Interest Rate decreases Exports decline Imports Increase

Trade Deficit (Country B example)

Gold outflow, Decreases money supply, Recession, Interest Rate increases, less investment, GDP decreases (Recession), imports Decreasing.

WWI and Aftermath

Gold standard abandoned Problems arise in attempts at restoring it in 1920s Perverse capital Movements: Short term to finance long term projects Europeans borrow short term

Gold Standard in Deficit Countries

Import less, Exports more Profits Decrease Currency Decrease Interest rate increases Money supply and prices decreases Recession Causes more exports, (good thing.)

Income Effect

Imports affected, Demand Curve will be shifted Appreciation Country (A) Export Decreases and Imports Increases; GDP decreases, (A) Imports decrease. Depreciation Country (B) Export Increases and Imports Decreases; GDP Increases and (B) imports Increases

Secondary Effect

Includes Price and Income Effect

If MPM > 0:

Income and Exports increase

If Exports Increase:

Income is increased

Additional Notes on Income Effect

Net export/Trade Surplus equivalent to Exports - Imports Increasing; meaning GDP Increases If GDP increases, Imports Increase (M= a+ B * Y) M= Import A: Autonomus Import B: MPM Y: GDP

Secondary Impact of Change in Exchange Rate

Price Effect Income Effect

1930s/Great Depression

US GDP, industrial production, imports, service payments drop by a significant amount. Long term lending ceased Europe Abandons gold standard (Internal Equilibrium)

Smithsonian Agreement (Free Exchange Rate System) 1971

US dollar went off gold Gradual introduction of flexible exchange rate of major industrial countries uS didn't have enough gold US g'ovt terminate convertibility of US dollar with gold Free exchange rate system for major industrial countries but non-major remained pegged.

External Equilibrium

Within balance of payment (Deficit, etc.)

Income Equation

Y= C + I - (X-M) Y: Income C: Consumption I: Investment X: Export (Positive Element to national income) M: Import (Negative Element to national income)

PART THREE OF LECTURE

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PART TWO OF LECTURE

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