POLI 4046 Final

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What is the Paris Club?

A group of officials from major creditor nations whose role it is to find coordinated and sustainable solutions to the payment difficulties experienced by debtor countries. As debtor countries undertake reforms to stabilize and restore their financial and macro-economic situation, Paris Club creditors provide them with appropriate debt treatment

What is the time-inconsistency problem?

A situation where policymakers are tempted to renege on a policy to pursue long-run objectives because there may be short-run gains from expansionary policy that produces bad long-run outcomes

What is currency stability?

A state's regulation of monetary circulation, accomplished through measures such as devaluation, currency conversion, deflation, annulment of currency, etc.

What is a "Balance of Payments"

A way of taking account of a nation's international economic activity

What is National Economic Autonomy?

Ability of market to adjust or self-correct

When did the Smithsonian Agreement become necessary?

After President Nixon stopped allowing foreign central banks to exchange U.S dollars for Gold, which marked the end of the Gold Standard

When did Floating exchange rates become more popular?

After the failure of the Gold Standard and the Bretton Woods agreement

What is conditionality?

Aimed at encouraging borrowing countries to implement strict structural reforms that can improve economy and trustworthiness to repay debts

What was the EMS?

An agreement in 1979 in Europe by members of the EEC to link currencies to encourage monetary stability in Europe

What is import substitution industrialization?

An economic development strategy that emphasizes the domestic production of goods that substitute for imports. ISI policies decrease imports and exports.

What is a floating exchange rate?

An exchange rate policy under which a government permits its currency to be traded on the open market without direct government control or intervention

What is an Exchange Rate misalignment?

An exchange rate which is inconsistent with a satisfactory balance of payments. If currency is pegged too high, this makes imports excessively attractive and exports hard to sell, which is liable to result in an unsustainable current account deficit

What is supply and demand in the Foreign exchange market?

At the equilibrium exchange rate, the supply and demand for a currency are equal. Shifts in the supply or demand for a currency lead to changes in the exchange rate. Because one currency is exchanged for another in a foreign exchange market, the demand for one currency entails the supply of another.

What were some of the commonalities between various states that experienced trouble with Hot Money?

Fixed Exchange Rates and a reliance on short-term capital flows (portfolio investments)

What is a mixed-system in regards to exchange rate regime types?

Fixed but adjustable exchange rate system Managed Float

Which Exchange rate regime grants the most policy autonomy for the government?

Floating exchange rate

What are the general results of Central Bank independence?

Lower inflation Lower growth Higher unemployment Overall economic effect unclear, through findings that higher CBI leads to lower inflation generally accepted

What does the Government do for a Balance of payment adjustment in a Fixed exchange rate?

Maintains value of currency through domestic price changes.

What was the Stabilization fund?

Mechanism set up by the government or the central bank to insulate the domestic economy from large influxes of revenue, as from commodities such as oil. Generally involves purchasing foreign denominated debt, especially if the goal is to prevent overheating a domestic economy

Why did countries "Blink" and why did the Central Banks stop lending money?

Mexico said it could not service its debts, 16 other nations rescheduled debt payments as well. banks stopped lending overseas

What is a Dollar Gut?

When a country imports more goods and services from the United States than it exports back to the U.S

What is a debt reduction agreement?

Collective action aimed at lowering debt rate payments so payments can start to be made

What is inter-group competition?

Competition to foist cost of adjustment on other groups

What is the IMF and what does it do?

"International Monetary Fund"- cooperative institute Promotes international financial stability and monetary cooperation Advisory members of economic policy Give financial assistance for troubled economy in financial crisis

What are the problems a Fixed exchange rate system can face during a recession?

"Wage Stickiness" (wages are slow to adjust to changing economic conditions) Since wages are slow to adjust, output and employment rate change before wages do. Therefore, decreases in price (of a good) leads to decrease in revenue (for a producer) which causes producers to slow production as the profit margin has decreased. This leads to a recession, eventually wages will decrease in response to excess labor but only after the recession has persisted

What is Keynsianism?

-aggressive fiscal policy (taxing and spending) to keep supply/demand in balance -Believe that the economy is demand-driven and the government can and should manipulate demand (Counter-cyclical spending)

How long did the Smithsonian Agreement last?

15 months, was ended due to speculators driving the price of the Dollar lower and lower and countries abandoned the peg in favor of Floating exchange rate systems

What were the 3 shocks of the Latin American Debt crisis?

2 Large oil price shocks created current account surpluses among oil-exporting countries

What is a fixed exchange rate?

A Fixed exchange rate is an exchange rate system where a currency's value is matched (or pegged) to the value of another single currency, a basket of currencies or to another measurable value (Gold).

What is the Accelerationist Principle?

Connection between fluctuations in consumption and capital investment. States that when demand for consumer goods increases, demand for equipment and other investments necessary to make these goods will also increase

What do the Current and Capital accounts look like for a country with a large trade surplus?

Countries with large trade surpluses are exporting capital and running a capital account deficit, meaning money is flowing out of the country in exchange for increased ownership of foreign assets

What is the Structural solution?

Create entirely new system

What is debt service?

Debt service is the principal and interest payments made on a debt over a period of time.

What does the Balance of payment adjustment look like for a country with a current account deficit?

Decrease level of import

What is Central Bank Independence?

Degree to which the central bank is free to decide on economic objectives to pursue Degree to which the Central bank is free to decide how to set monetary policy The Degree to which central bank decisions can be reversed by other branches of the government

What was the source behind the Asian Financial Crisis of 1997?

Due to collapse of currency exchange rates. Started when Thailand unpegged the Baht from the U.S dollar and the currency's value immediately dropped

Why does depreciation of a currency happen?

Economic fundamentals, interest rate differentials, political instability, or risk aversion among investors

What was the scale of the Asian Financial Crisis of 1997?

Effected almost all Asian countries, GDP's fell severely

What was one of the major reasons Bretton Woods failed?

Eroded confidence in the Dollar

What do Fixed exchange rate systems provide for the people who adopt it?

Exchange rate stability, but constrains government policy autonomy

What were some effects of the Asian Financial Crisis of 1997?

GDP's fell tremendously, Anti-Western sentiment began to sprout amongst the citizens of negatively effected countries. Blame put on George Soros

What is the State-Centered approach?

Generally denoted by a move towards insulating monetary policy to politically independent central banks

How does appreciation of a currency happen?

Government policy, interest rates, trade balances, and business cycles

What do Float exchange rate systems provide for the people who adopt it?

Governmental policy autonomy, but have little exchange rate stability

What is the G-5?

Group of 5 that includes Brazil, China, India, Mexico, and South Africa. These emerging markets are becoming increasingly important on the world stage. Seeks to improve trade and diplomacy with all member states

What does HIPC stand for?

Highly Indebted Poor Countries

What do large changes in a Capital Account of a nation indicate?

How attractive a country is to foreign investment and can have substantial impact on exchange rates

What does a net positive mean for countries in a current account?

They are in a surplus of goods and services, they are a net exporter of goods and services

How does the Balance of payment adjustment differ in a Fixed exchange rate and a Floating exchange rate?

In a Fixed exchange rate, domestic prices will change while exchange rates stay the same In a Floating exchange rate, domestic prices will remain the same while exchange rates will change

What is expansionary fiscal policy?

Increase government spending and decrease taxes to reduce inflation

What does the Balance of payment adjustment look like for a country with a current account surplus?

Increase level of import

What was the EMU?

Integrated the economies of the EU member states through a group of economic and monetary policies. Launched in 1992 to improve economic stability and provide strong and sustainable growth

What was Bretton Woods?

International conference after WWII which established a fixed exchange rate system for the major currencies that lasted until the early 1970s. Countries that took part pegged their currency to the U.S dollar. Replaced by current mostly flexible exchange rate systems. Established IMF and World Bank.

What was Petrodollar recycling?

International spending or investment of a country's revenue from petroleum exports. Refers to phenomenon of major petroleum-exporting states, mainly OPEC members plus Russia and Norway. Earned more money from the export of crude oil than they could efficiently invest in their own economies

What is the effect Central Banks have on Exchange rates?

It is too early to tell, increased conflict with political parties and the central bank

What was the Plaza Accord?

Joint agreement signed by France, West Germany, Japan, The U.K and the U.S to depreciate the U.S dollar to the French Franc, the German Deutsche Mark, the Japanese Yen, and the British Pound Sterling by intervening in the currency markets

What does long term currency price reflect in a Floating exchange rate? What does Short term reflect?

Long term currency price reflects relative economic strength and interest rate differentials. Short term reflects speculation

What does the government do for a Balance of payment adjustment in a Floating exchange rate system?

Nothing, changes in exchange rate lead to adjustment

What is pocketbook voting?

Pocketbook voting occurs when the voter looks at his or her personal finances and circumstances to decide how to vote.

What is monetary policy?

Policies that control the supply of money, the price of money, and the availability of credit.

What is the liquidity solution?

Provide more Liquidity

What is a Current Account?

Records a nations transactions with the rest of the world. Specifically, its net trade in goods and services, its net earnings on cross-border investments, and it's net transfer payments over a period of time

What is a Capital Account?

Records payment flows for financial capital, such as real estate, stocks, bonds, and government securities

What is Tobin Tax?

Referred to as the Robinhood tax, as many see it as a way for governments to take small amounts of money from the people making large short-term currency exchanges

What is hot money?

Refers to capital flows moving to countries with higher interest rates (Speculative Portfolio Investments)

Why does the U.S have such a large trade deficit?

Result of foreign investors finding U.S assets particularly attractive, therefore driving the value of the dollar up

What were some possible solutions to the failure of Bretton Woods?

Revaluation, Decrease American imports, Increase American exports

What is Banking Liberalization?

Savers becoming more willing to provide more funds to Banks, so banks can invest more in both loans and to firms. Causes return on loans to firms and the mortgage rate to decrease.

A country which has adopted a fixed exchange rate and is facing pressure for appreciation of its currency relative to its peg in international markets will undertake what response?

Sell its own currency in foreign exchange markets to buy the currency in which it is appreciating against (flood market with your money to make it more available, thereby less attractive)

What does the U.S. current account look like?

Significant deficit meaning U.S imports most (if not all) of its goods and services

What is the "Balance of Payments adjustment"

Sometimes payments do not always balance automatically which may require deliberate balancing, actions to balance are different in Fixed and Floating exchange systems

What is SDR?

Special Drawing Rights - created by the IMF Created by the International Monetary Fund (IMF) in 1969, the SDR is a reserve asset that can be traded between countries in exchange for liquidity, or cash. Each time the IMF decides to issue a new allocation of SDRs, the organization is basically acting as an international central bank. The IMF distributes these reserve assets to its 190 member countries in proportion to their IMF share and relative economic standing in the world economy. So richer countries get more SDRs, while poorer countries receive fewer.

What was the Smithsonian Agreement?

Temporary agreement among the 10 leading developed nations of the world. Made adjustments to the Fixed exchange rate system under Bretton Woods and effectively created a new standard for the dollar the other industrialized nations pegged their currencies to the Dollar.

What is exchange rate volatility?

Tendency for foreign countries currencies to appreciate or depreciate in value, thus affecting the profitability of Foreign exchange trades.

What currency did the EMS peg to and what happened?

The Deutsche Mark, governments needed to maintain the peg as the German Central Bank inflation targeting policies were being "imported" by the pegging countries. Commitment to peg was shaky

What describes the U.S Capital Account (and other countries) condition?

The U.S runs an extremely large Capital Account surpluses, meaning more capital is flowing into the country than flowing out, cause by an increase in foreign ownership of domestic assets

What is Dollar Overhang?

The amount of U.S. Dollars overseas exceeded U.S reserves of Gold, undermining dollar convertibility to Gold

If supply outstrips demand in a floating exchange rate, what happens to the currency?

The currency will fall

If demand outstrips supply in a floating exchange rate, what happens to the currency?

The currency will rise

What is sociotropic voting?

The effect judgement has individually on how the nation is doing economically on their evaluation of incumbents.

What is the Foreign exchange market?

The foreign exchange market is a global decentralized or over-the-counter market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices.

What is the natural rate of unemployment?

The rate of unemployment when the labour market is in equilibrium.

What does a net negative mean for countries in a current account?

They are in a deficit of goods and services, they are a net importer of goods and services

In the Sectoral Model how is Exchange rate policy determined?

Through Domestic competition between sectors with differing interests

What is an example of a Heterodox alternative?

To control inflation you would alternatively utilize price and wage control besides other orthodox means

What is the purpose of International Monetary Relations?

To facilitate international economic exchange

What is the purpose of a Fixed Exchange rate?

To keep a currency's value within a narrow band

What is depreciation mean for a currency?

Value of currency decreases in comparison to another currency

What is does appreciation mean for a currency?

Value of currency increases in comparison to another country's currency.

Does the government intervene in a Fixed exchange rate? If so, Why?

Yes, may intervene to maintain value

What is the Phillips Curve?

a curve showing the short-run relationship between the unemployment rate and the inflation rate

What is enfranchisement?

granting someone the rights and protection of a citizen of a particular country

What does the Phillips curve say about inflation and unemployment?

high rates of unemployment are usually paired with times of low inflation and vice versa

What is moral hazard?

lack of incentive to guard against risk where one is protected from its consequences, e.g., by insurance.

What is price stability?

low and stable inflation/deflation

What are nominal wages?

pay rates unadjusted for inflation

What is a poverty trap?

poor nations are unable to escape poverty as they are in need of major capital flows, but no one grants capital due to the nation being poor

What is Exchange rate risk?

risk that the value of your investment may be devalued by the exchange rate of foreign currencies

What is fiscal policy?

the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy

What are real wages?

wages adjusted for inflation


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