PS124a Post Midterm Quizzes

Locational advantages examples

- Presence of natural-resource deposits, - - Large consumer markets that are expected to grow rapidly - Lower cost of the factors of production used intensively in the production of a specific product

According to the podcast, which of the following are true about central banks, their missions, and their response to the recent financial crisis? Federal Reserve and ECB were each either aggressive or conservative and why ...

- The Federal Reserve responded aggressively to the recent financial crisis by drastically lowering interest rates because it wants to avoid a repeat of the unemployment in the 1930s - The European Central Bank responded conservatively to the recent financial crisis by moderately lowering interest rates because it wants to avoid a repeat of the hyperinflation in Germany in the 1920s

Oatley says this about growth rates, global inequality, and people in poverty

1) Based on the ratio of the richest to poorest country's income, global inequality has increased since 1980 2) Based on the estimated concentration of global income across all people in the world, global inequality has decreased moderately since 1980 3) Based on the population-weighted growth rates of poor and rich countries, global inequality has decreased since 1980 4) The absolute number of people living in poverty in the world has fallen since 1980

Which of the following occurred during the implementation of the Bretton Woods monetary system?

1) Britain attempted to restore convertibility of the pound shortly after the end of World War 2, but convertibility was quickly suspended because the country was in danger of running out of dollars and gold, 2) The Marshall Plan helped European governments acquire a sufficient supply of dollars to enable them to make their currencies fully convertible with the dollar 3) The Marshall Plan helped European countries import goods from the US and other countries

The breakdown of the Bretton Woods international monetary system did not lead to a global depression because:

1) Confidence in the US dollar was maintained, in part because of raised interest rates 2) Confidence in the US dollar was maintained, in part because there were few alternatives to the dollar, so the dollar remained the main currency used for reserves and international transactions

Some causes for the real estate bubble in the US in the 2000s likely include

1) Creditor nations such as China were willing to lend money to the United States in spite of low interest rates 2) Financial institutions used complex instruments such as mortgage backed securities and collateralized debt instruments to sell large volumes of real estate mortgages at low interest rates 3) The US government (Fed) was unwilling to raise interest rates

Types of exchange rate systems:

1) Fixed exchange rate system 2) floating or flexible exchange rate system 3) fixed-but-adjustable exchange rate system 4) managed float exchange rate system

The following major economic shocks hit Latin America in 1979 and the early 1980s (interest rates, oil prices, recession)

1) Interest rates went up in the US, which translated into higher interest rates for Latin America debt with variable interest rates 2) Recession in the advanced industrialized world reduced demand for Latin American goods and reduced their terms of trade 3) Oil prices rose again, increasing the cost of imports

The following factors motivated indebted Latin American governments to reduce their role in their countries' domestic financial systems and to liberalize their capital accounts in the late 1980s and 1990s:

1) Key members of the ISI coalition lost the strength to oppose economic reform 2) The US and other bilateral and multilateral donors advanced funds to guarantee the principal of "Brady bonds," which were commercial bank debt converted into bonds with lower face value, thus enabling debtor governments to capture a larger share of the benefit of reform 3) Governments recognized that the outward-oriented policies of East Asian governments offered useful lessons for Latin American governments

A disadvantage of a strong currency resulting from rapid currency flows is

1) Producers don't have time to adjust to the new price structure 2) It makes exports more expensive 3) Dramatically expanding the money supply to weaken the currency could lead to inflation

The rise in private lending to developing countries in the 1970s was driven by

1) The 1973 oil shock, which generated large current account surpluses in oil-exporting countries that enabled those countries to lend petrodollars to commercial banks, who then lent to developing countries 2) Growing demand for foreign capital in developing countries pursuing ISI strategies

As a result of the strong dollar in the early 2000s, what did the government do?

1) The Bush Administration blamed the loss of American competitiveness on the polices and practices of foreign governments such as China and Germany 2) Congress proposed laws that protected US markets from Chinese imports

According to the podcast, European Monetary Union was created because

1) The French conditioned support for German unification on German support for monetary union 2) Greece and other Mediterranean countries promised to maintain low budget deficits and inflation

Nationalization of foreign-owned private property became widespread following WORLD WAR ONE because:

1) The Marxist-Leninist government in the Soviet Union rejected the idea of private property 2) Some Latin American countries began to expropriate foreign owned investments, especially in the extractive industries and public utilities 3) Developing countries began to broaden the notion of "pubic purpose" to include the state's role in the process of economic development

Some challenges the world economy faces, with regard to the international monetary system, include:

1) The US dollar and the euro are arguably the only instruments capable of supporting current levels of international transactions, but their economies are weak 2) The United States needs to allow the dollar to weaken so that the United States can reduce its current account deficit; reducing government deficit spending will help, but could also reduce the economic growth needed to provide international liquidity 3) The European Central Bank needs to be more willing to support economic growth, but Germany is reluctant to allow interest rates to remain low

Which of the following occurred during the breakdown of the Bretton Woods monetary system?

1) The US ran large, consistent balance of payment deficits because of the Vietnam War 2) The US ran large, consistent balance of payment deficits because of expanded welfare programs at home, including Medicaid, Medicare, and Social Security, 3) Germans who worried about inflation more than collapse of the exchange rate system sold large volumes of dollars to buy back German marks 4) The Nixon administration loosened monetary policy (reduced interest rates) to stimulate the US economy

IMF Managing Director's response to what she calls the world's triple crisis

1) To address the economic crisis, recommended actions include expansionary monetary policy, increased spending in areas such as infrastructure by countries able to afford it, and labor market reforms to help workers find jobs 2) Fiscal policies such as a carbon tax or emissions trading in order to reduce environmental damage while generating income for governments 3) Increase tax revenues and target spending to the people who need it most, which will address the social crisis

If Country B has a fixed exchange rate and it faces a balance of payments deficit, what are some actions the government could take to maintain the peg (prevent Country B currency from losing value)? (THREE THINGS)

1) Use foreign currency reserves to buy back Country B currency from other countries 2) Impose capital controls to prevent actors from using Country B currency to buy foreign currency 3) Use the Country B Central Bank to increase interest rates in Country B

The strong dollar in the United States in the 1990s and 2000s ...

1) Was a contributing factor to the fact that the United States imported more than it exported 2) Was caused, in part, by the fact that China and other East Asian countries purchased a large volume of US government debt and corporate debt

Possible solutions for a government's credible commitment problem resulting from the time-inconsistency problem regarding unemployment and inflation include

1) fixed exchange rates 2) independent central banks

Monetary policy is insulated from political influence in countries with an independent central bank because...

Actually, monetary policy is NOT fully insulated from political influence because although central banks control monetary policy, elected governments generally play an active role in exchange rate policy, a backdoor to influence monetary policy

In order for monetary policy to successfully stimulate hiring, increase or decrease in inflation must be expected/unexpected to increase/decrease the real/nominal wage rate

An increase in inflation must be unexpected in order to reduce the real wage rate

Increase in a currency's value under a flexible exchange rate system

Appreciation

NAME: All national currencies are fixed to gold (and the dollar, which is fixed to gold) but can change the exchange rate if they face a fundamental disequilibrium, with approval from the IMF. Governments are allowed to restrict currency exchange to prevent foreign currency, resulting in exchange rate stability, but declining confidence in the dollar led to a liquidity problem

Bretton Woods System

NAME: All national currencies are fixed to gold. Governments do not restrict currency exchange; central banks respond to surpluses or deficits of gold by lowering or raising interest rates, resulting in exchange rate stability but price instability

Classic Gold Standard

Describe Rodrik's recommendation regarding WTO rules

Countries should be allowed to "violate" WTO rules when those rules threaten to undermine domestic labor and environmental standards or hamper development goals, but only if the decision to violate those rules was made using democratic procedures such as transparency, accountability, inclusiveness, and evidence-based deliberation

Thomas Peterffy's opinion about government regulation and technology in financial trading is that

Decades ago, deregulation of technology in financial trading improved social welfare by increasing efficiency and leveling the playing field by lowering the cost of transactions, but today, more regulation of technology may improve social welfare by reducing the risk of market crashes and by reducing incentives for actors to over-invest in technology to take advantage of other actors without that technology

Decrease in a currency's value under a floating exchange rate system

Depreciation

Decrease in a currency's value under a fixed exchange rate system

Devaluation

According to Oatley, the following actors are often opposed to enforceable global labor standards (such as maximum working hours, minimum wages, and safety conditions) because such standards may lead to less investment and higher poverty rates in developing countries:

Developing country governments and economists

The rapid accumulation of debt in the 1970s contributed to growth/decline of Latin America and/or East Asia?

Economic growth in Latin America in the 1970s

NAME: The exchange rate for most national currencies, as well as gold prices, are determined by transactions in foreign exchange markets and gold markets rather that set by governments

Floating Exchange Rate System

According to Oatley, developing countries draw heavily on foreign capital because

Foreign capital is a way for developing countries to overcome a shortage of domestic savings to increase investment and thereby raise per capita incomes

When Francois Mitterand became president of France

He pursued policies to reduce unemployment, reflecting his party's support by workers, then was obliged to devalue the Franc in response to foreign speculators

The massive accumulation of debt in Latin American countries in the 1970s made those countries vulnerable to international shocks because

ISI's focus on capital-intensive projects failed to generate exports, which led to high debt service to export revenue ratios

Between 1982 and 1986, net capital flows were transferred from the seventeen most heavily indebted countries to banks in advanced industrial countries because

Lenders acted as a united front because they solved the free-rider problem by the IMF refusing to advance credit to a government until commercial banks pledged new loans to the same government

Increase in a currency's value under a fixed exchange rate system

Revaluation

According to Mallaby, the ECB has printed over a trillion euros to purchase financial assets, which has had the effect of

Saving the euro system by providing funds for private banks to lend to private firms, thus preventing banks and firms from going bankrupt, and funds for private banks to lend to governments, thus preventing sovereign defaults

Creditors initially diagnosed the debt crisis of the early 1980s as a

Short-term liquidity problem that could be solved with new loans in exchange for reduced budget deficits and exchange rate devaluation to improve the balance of trade

One reason the Bretton Woods international monetary system came to an end was because

The Nixon administration signaled to the Federal Reserve that it wanted interest rates to stay low

Regarding a carbon tax, Mankiw argues that

The US should convince China to start with a small carbon tax together with the US, and then increase the tax rate over time, with a reciprocity strategy such as tit-for-tat to punish cheating, in order to facilitate cooperation

According to Moravscik, the state of democracy in Europe is that,

There is a Democratic Surplus, because no long-term solution to Europe's woes can be imposed on a member state without the consent of its elected government, and elected governments often find it difficult to commit to the types of long-term reforms that both northern and southern Europe require today

Governments of advanced industrial economies increased their role in the government, such as attempting to achieve full employment, after World War 2 because

There was a shift in ideas called the Keynesian Revolution, There was a shift in political power away from the propertied classes to the working class

Debtor governments never threatened collective default because (think PD)

They were caught in a prisoners dilemma - collective default could yield collective benefits, but each government had an incentive to defect from collective default in order to seek a better bilateral deal

Before the introduction of the common currency in Europe, non-Germany European countries (such as France, Italy, and Spain) traditionally offset their inability to match Germany (with regard to low wages, low government debts, and high international competitiveness, which led to debt or competitiveness crises in non-German countries) by pursuing the following strategies (see Moravcsik): a. restrictions on capital flows b. reduce private spending (on consumption) c. unilateral (national) control over interest rates and the money supply d. manipulation of exchange rates. e. reduced wages

a. restrictions on capital flows c. unilateral (national) control over interest rates and the money supply d. manipulation of exchange rates.

The United States developed major current account deficits in the late 1990s and 2000s because (CHECK ALL THAT APPLY) a. The United States exported more than it imported b. China exported more than it imported c. The United States imported more than it exported d. Japan and Germany exported more than they were imported e. East Asian countries exported more than they imported

b. China exported more than it imported c. The United States imported more than it exported d. Japan and Germany exported more than they were imported e. East Asian countries exported more than they imported

According to Krugman, requiring work conditions in developing countries to conform to our labor standards is likely to result in (choose one) a. A privileged labor aristocracy, and the poor majority no better off b. No improvement in the lives of factory workers or farmers c. Either a privileged labor aristocracy, and the poor majority no better off, or no change, or even a decline in income levels d. Better living standards and income levels for both factory workers and farmers

c. Either a privileged labor aristocracy, and the poor majority no better off, or no change, or even a decline in income levels

According to the Partisan Model of Monetary and Exchange Rate Politics:

o There is a tradeoff between low unemployment and low inflation o An decrease in interest rates will result in lower unemployment but carries the risk of higher inflation o Left wing parties tend to favor low interest rates and a floating exchange rate more than right wing parties

According to Moravcsik, Germany's main motivation for a single currency in Europe was

to promote its own economic welfare through open markets, a competitive exchange rate, and anti- inflationary monetary policy