BUS 313 FINAL review

1. Give two explanations for the growing income and wealth inequality in the United States and Europe.

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1. What explanation does Jared Diamond, in "Guns, Germs and Steel", offer for why some countries are more successful than others at economic development?

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a. Who is the current leader of the International Monetary Fund?

Christine Lagare

a. Who is the current leader of the U.S. Federal Reserve?

Janet yellin

Dodd-Frank

Law passed to protect consumers and re-strengthen regulation in the financial sector in 2010 (during the financial crisis)

a. What is meant by "Quantitative Easing" (QE)?

Substantial increases in the money supply and monetary base

a. Treaty of Versailles

Treaty that ended WWI

What will happen to the dollar value of peso-denominated earnings at a U.S. company's Mexico subsidiary if Mexico has inflation of 10%, the U.S. has inflation of 0%, and the peso/dollar exchange rate obeys relative purchasing power parity?

a. "obeys PPP" = Nothings happens i. b/c while Mexican inflation has gone up, the Peso has gone down by the same proportion, which means the $ value is unchanged b. Real Exchange Rate is unchanged

A central bank buys its own currency to keep its exchange rate fixed in value. How can this central bank sterilize the impact of this action on its domestic money supply?

a. (just do the opposite) b. Selling Foreign Exchange (shrinks MS) = want to buy treasury bills (restores MS to where it was) c. Buying Foreign Exchange (increase MS) = (want to sterilize the effect) sell treasury bills i. *Transaction in any kind of asset on CB's the balance sheet affects the MS 1. Selling asset = shrink MS 2. Buy asset = increase MS

1. Greece is forecasting a current account deficit next year of 10% (-10%) of GDP. If the capital account is forecast to be in balance, what must the financial account be -- as a percentage of GDP -- to allow Greece to run a current account deficit of this magnitude?

a. -10% Current Acc. + Capital Acc. + Financial Acc. = 0

What is the Foreign Corrupt Practices Act? What does the Act prohibit?

a. 1977 b. Can't bribe foreign governments (basically) c. Requires gov't to keep accurate books (that were transparent)

1. What will happen to British interest rates, and the exchange rate of the pound against the dollar, if the Bank of England decreases the money supply?

a. British Interest rates should go up, and the pound will appreciate

1. How did the gold standard, fully in effect from 1870 to 1914, work?

a. Each currency is fixed against gold (this also means they're fixed against each other) b. Gold Standard = value of fixed Exchange rates i. Automatic correction/adjustment to CA imbalances (i.e. surplus/deficit) c. International settlements were typically computed in gold i. If a country exported more than it imported = gaining gold = increase in money supply 1. *more gold = more money d. Increase in the money supply (due to CA surplus) i. Income/employment/prices may rise = increase in imports (more money to spend on things), decrease in exports = increase in imports b/c others prices aren't rising, while your are = decrease in exports b/c prices aren't as attractive *Vices versa if a CA deficit occurred *CA surplus and deficit will fix themselves over time

1. Define "expenditure changing" policies and "expenditure switching" policies. Which kind of policy is best able to achieve - simultaneously - internal and external balance?

a. Expenditure Changing i. Traditional fiscal policies 1. Cutting taxes, increasing gov't expenditures b. Expenditure Switching policies i. Devaluations or revaluations 1. Devaluation a. Switches expenditure away from domestic goods/toward foreign goods (or vice versa) ii. The solution to achieving internal and external balance

1. In a system of flexible exchange rates, explain how monetary policy works to stimulate output and employment.

a. Lower interest rate = currency depreciation (more exports)

What happens to the money multiplier, and the money supply, during a banking panic?

a. Ppl try to get into currency and out of deposits i. Ppl want their money in their hands and not in the banks b. Currency deposit rises to infinity = reserve deposit goes to 1 = money multiplier (1+k / r+k) goes to 1 i. Means it's not a multiplier at all, there's no multiplying going on. ii. MS drops to the level of the monetary base

1. Why is monetary policy unable to affect output and employment in a system of fixed exchange rates?

a. Spends all it's time making sure the exchange rate doesn't move i. Unable to spend anytime trying to bring interest rates down to stimulate spending; or raising interest rates to slow down spending 1. Moving interest rates moves the exchange rate (interest rate parity) b. No time to bring interest rates down to fix the exchange rates

Why did the Bretton Woods system of exchange rates, in effect from 1944-1971, fail?

a. System put together after WW b. $ is the center, it's fixed against gold i. every other currency is fixed against the $ c. Failed b/c i. 1944: US was the dominant economy (only one that really survived) ii. Japan & _____ : economy recovered iii. US: Guns and Butter @ the same time 1. = overheated economy = lots of imports (good uncompetitive b/c of inflation) = Higher CA = increased borrowing (more lending to the US) d. What to do? i. President Nixon (?) cut the ties btwn $ and gold e. Plans didn't work i. We've been on a floating exchange rate ever since.

1. The monetary policy trilemma states that a country can only have two of the following three options: monetary policy autonomy, free international capital flows, and exchange rate stability. Which two of the three have been chosen by:

a. The United States b. China i. Monetary policy autonomy (1) 1. Allowed currency to appreciate & exchange rate to change on a day-to-day basis ii. Free international capital flows (2) *Giving up a little of exchange rate stability c. Germany i. Exchange rate stability in the Eurozone (2) ii. Free international capital flows (3)

Compare and contrast the "mandates" of (a) the U.S. Federal Reserve and (b) the European Central Bank.

a. US Federal Reserve: Dual mandate i. Full employment, price stability b. European CB: Single mandate i. Price stability 1. 0-2% inflation (nothing more) 2. technically not supposed to worry about unemployment

1. While traveling to Beijing, you use your credit card to purchase a meal at a 3-star restaurant. Explain the impact of this transaction on the current account and the financial account of the U.S. balance of payments.

a. US: Imports of services = debit in CA, credit in Financial Account b. China: Export of Services = Credit in CA, debit in Financial Account

What is the name of the legal authority the Obama Administration has used for these negotiations?

i. "Fast Track Authority" 1. congress can't amend this 2. President gives it to the congress and they can only vote it up or down

a. What benefit and cost considerations influence the size of an optimum currency area?

i. Benefits: 1. Monetary efficiency gains a. Ppl don't have to change currencies when going to different countries 2. Investors who make decisions over extended periods of time, don't have to worry about the exchange risk b/c everyone is using the same currency

1. Name three challenges China's economy faces as its leadership tries to change the source of growth from export- and public-investment-led to consumption-based.

i. Capital flight out of China ii. Municipal debt was to high iii. Bubble in the stock market iv. Bubble in real estate v. Excess capacity in Chinese industries

a. How can these costs of a single currency be mitigated?

i. Costs 1. Giving up monetary policy a. Can't use it to steer the economy 2. Hawaii doesn't have it's own CB ii. What can mitigate this? 1. Look @ videos on European commission(?) and European Financial Crisis 2. Looking for countries that are ... a. Equally productive i. Countries can have different styles as long as they're productive ii. GNP correlation iii. Similar inflation rates (reflect similar levels of productivity) b. Also helps to have a Fiscal mechanisms that can deal with these imbalances at super national level (i.e. Federal Gov't) i. Fed gov't recycles funds in a way to even out recessions and "blooming periods" ii. No fed gov't = no unified fiscal policy

a. What was John Maynard Keynes' solution for an economy that found itself in a Liquidity Trap?

i. Government spending (have them spend more) 1. Gov't spending increases budget deficit (video on japan) ii. He argues against the notion that the economy will adjust on its own 1. Ppl think that b/c there's so much excess capacity that prices will fall, if prices fall that will put ppl back to work in the long run. a. Prices tend to be "sticky", they don't fall very fast. iii. "Yeah. Okay. But in the long run we're all dead. So we need to do something sooner." 1. B/c prices fall slowly, and it would only matter in the long run 2. The short run solution would be for the gov't to increase spending

a. How is quantitative easing being used in Abenomics?

i. Look at the graph where the US monetary base, in 4-5 years, goes from $800 billion to $4 trillion. 1. Reason the Euro and Yen have depreciated in the last year or so 2. US is done; the economy has recovered ii. All the extra money is supposed to depreciate the currency. 1. Ought to improve exports 2. Ought to be more economic growth

a. Who is the current leader of the European Central Bank?

i. Mario Draghi

a. Treaty of Maastricht

i. Netherlands, 1992 1. Sets up process by which the euro was created a. The Monetary Union Treaty (triggers monetary union)

a. Treaty of Rome

i. Sets ups the Common Market (1968); 1. Starts European Economic Community 2. Grow to be known as the European Union

a. Basel III

i. Standards for capital (capital that banks must hold on their balance sheets) 1. The riskier the assets = the more capital you need (a bigger buffer in case things go south) ii. Put forward by the Bank for International Settlements

a. What is the name of the free trade agreement the Obama Administration has negotiated with 11 other Asia-Pacific countries?

i. Trans Pacific Partnership (TPP)

1. In a system of flexible exchange rates, explain how fiscal policy works to stimulate output and employment.

i. Video on European Financial Crisis 1. Increases confidence; limits yearly structural deficits to 0.5% of GDP 2. Makes sure national budgets don't put other European economies at risk (example of a fiscal union) b. Stim Fisc. Policy i. Fiscal policy = how much it collects (taxes) and how much it spends (gov't) ii. Increase gov't spending iii. Cutting individual taxes (to increase spending in the economy) iv. Side effect: as economy moves forward the D for money rises 1. Increased

a. What is meant by a Liquidity Trap?

i. When interest rates go to 0 (as low as they can go; cant go any further) 1. Means they can't go any further a. To get economy moving again by lowering interest rates, persuading more business investments (b/c you have more capital budgeting decisions).