B19 Flashcards
International monetary systems: a historical overview
Does monetary actions of one nation have no effect on countries that does not use that currency
No, becouse exchange rates are relative to eachother a change in the exchange rate has an equal oposite reaction in other countries
What is internal balance in an open economy
A full utalization of a countrys resources (f.ex full employment) and domestic price level stability
What is external balance in an open economy
When the current account is not so deeply in defecite that they cannot pay back their debt nor have such a surplus that they put other countries in that position
Can a country run a current account defecit forever
theoretically yes as long as the GDP grows faster than the interest payments although if something bad happens they will have some serious trouble
What is the monetary trilema
Choose between exchange rate stability, monetary policy power or freedom of internationa capital movements, you can only have two
How did the gold standard effect current account policy
As gold was sonmewhat finite and changes required costly transportations of gold between central banks the gold standard incentiviced a payments equalibrium
what is the price specie flow mechanism
That a trade imbalance leads to a proportional change in money supply in both economies which shifts the exchange rate so that the trade balances out
What are the tradeoffs of the gold standard in therms of the monetary trilemma
It allows exchange rate stability and international capital flows but not monetary policy
How was the beretton woods system different from the gold standard
The US became the global reserve center and while the IMF allowed devaluations/revaluations in certain cases which gave more monetary power it also caused speculative attacks
What effect may an excessive current account surplus have on employment
Overemployment as people work to much and to few people are unemployed to account for fluctuations in demand, machines break more and there may be a wage price spiral, it might also lead to a painful crash, it also pisses off all other trading partners
What is an expenditure changing policy
A change in fiscal policy, called expenditure switching policy in external terms as it switchs exports demand to government
Could governments achieve internal and external balance in the bretton woods system
No, with only fiscal policy it is not possible
What was the confidence problem in the bretton woods system
That as other economies grew and accumulated more dollar assets the US had to few gold nuggets to fufill a potential exchange of dallars for gold
Is imported inflation possible in a fixed exchange rate
Yes, if one country can engague in monetary policy like the US in the bretton woods system, otherwise the central banks would cooperate to make that not happen
What are the effects of a permanent monetary expansion on foreign countries if the expanding nation is large
As the output of the nation rises the effect on foreign is ambigous
