Final MGMT 1035: Week 9 Flashcards
Global Finance
What is money?
Any generally accepted medium of exchange which enables a society to trade goods without the need for barter; any objects or tokens regarded as a store of value and used as a medium of exchanges
Forms of Money?
o Coins: valued for metal content or representative tokens
o Paper Money: issued to represent values, from ancient China to modern societies
o digital currency: exchanged as information, rather than physical money
All of these work on with shared consensus of value.
Three kinds of money?
commodity, token, fiat
Commodity
gold and silver coins, but also things like shell, grain to other agreed items of value
Token
coins or paper that can be exchanged for the face value of gold or silver “gold standard”
Fiat Money?
money issued by the government
not backed by gold or another commodity but rather by declaration of the issuing government
The Big Mac Index illustrates…
Purchasing-Power Parity
The U.S. Federal Reserve was created in response to what crisis?
The 1907 financial Crisis.
The Treaty which created the clear rules for the creation of a common European currency was…
The Maastricht Treaty
When it was created in 1694 the purpose of the Bank of England was to…
Raise money for the Navy
Potosi is situated in which country?
Bolivia
Globally, the most popular form of exchange rate is…
Managed Floating
The Canadian dollar is an example of…
Fiat money
The style of bank system in Canada is best decribed as…
branch banking
Actual Euro notes and coins began to be distributed in…
2002
What was the first city of capitalism?
Potosi
for it supplied the primary ingredient of capitalism: money
What changed the nature of trade with China and other parts of Asia and drove Europe to seek their own colonial opportunities?
Spanish silver
the birth of global economics and trade
What was the global economic impact of gold and silver from South and Central America?
The influx of gold and silver changed global economies, transitioning Europe to a cash-based system. This shift facilitated the development of capitalism focused on monetary exchange rather than barter.
What country’s the world’s leading sources of lithium?
Potosi, Bolivia
(influence on capitalism)
What was the first central bank?
Bank of England, the model for most Central Banks, was formed in 1694
Why was the Bank of England formed?
Designed to raise money for the government to finance a navy
What is the US central bank?
Federal Reserve created, 1913
What is the role of the Federal Reserve?
- Maximize employment
- Stabilize Prices
- Moderate Long-term interest rates
(Regulate banks and supervised, approved financial mergers, and stabilized the financial system)
Why was the Federal Reserve created?
response to financial cries of 1907 and a desire to ease ups and down in the economy
Who helped recover the financial crisis for the federal reserve?
JP Morgan, was given 30 million dollars and was told to fix the New York banking systems survived the crisis
pledged large sums of his own money and convinced other New York bankers to do the same to shore up the banking system.
What was the financial crisis of 1907, leading to the federal reserve?
Enter real estate transactions that didn’t go as planned and faced a situation where they didn’t have enough cash to meet deposits, leading to a failure for a bank
How did the US Government help the financial crisis of 1907?
looked to government for support and federal government gave them about 30 million dollars
Who helped create the Federal Reserve, and helped which state?
JP Morgan, New York
When/ What was the Federal Reserve Act?
1913;It was implemented to establish economic stability in the U.S. by introducing a central bank to oversee monetary policy, shaping the U.S. financial system.
When did Canada abandoned the gold standard?
1931
after Great Depression allowing Canada to reinflate economy
What’s the Royal Commission for the Bank of Canda ?
established in 1933 to study issue of central bank: monetary and banking issues
headed by Lord Macmillan
When was the Bank of Canada established and its role?
1935; control Canada’s monetary supply and moderate inflation
promote the economic and financial welfare of Canada
When was a standardized currency introduced in Canada?
1950
When and where did chartered banking begin in Canada?
Chartered banking began with the Bank of Montreal in 1817, followed by others like the Bank of Nova Scotia in 1832.
How did the Canadian government structure the banking system?
The government encouraged a branch banking system dominated by small banks, which grew into the “Big 5” controlling branches across Canada.
How did banking in Canada differ from the U.S.?
Canada-> centralized branch banking system
U.S. -> created a decentralized system of many small banks.
What was the significance of the 1967 Bank Act revisions in Canada?
removed the 6% annual interest rate on personal loans
banks entered the mortgage field
What company came about after the Bank Act?
Canadian Deposit Insurance Company
What triggered stronger banking regulations in Canada after 1923?
The failure of the Home Bank in 1923
leading to reforms that strengthened the banking system—essential during the 1929 Great Depression.
What key changes followed the 1964 Porter Commission recommendations?
enter the mortgage market, be more competitive banking system
The Euro is the official currency of how many members of the EU?
20 out of 27
What’s Differentiated Integration?
not all members states participate in all EU policies to the same degree or at the same time
What was significant of the 1957 Treaty of Rome?
set up European Economic Community
European Economic Community (EEC)
Belgium, 1957
to work towards integration and economic growth, through trade among six European nations
Belgium.
Germany.
France.
Italy.
Luxembourg.
the Netherlands.
What’s the currency snake?
an exchange rate system that operated between various member countries of the EEC during the 1970s, in which exchange rates between the currencies of the participating states were only allowed to fluctuate within a restricted range
Bretton Woods Agreement
Under the Bretton Woods system, established a system through which a fixed currency exchange rate could be created using gold as the universal standard dollar
1969
$35/ounce
Economists Approach of the EU
Germany and Netherlands: economic convergence before (precondition) monetary integration
“Monetarist Approach”:
monetary integration leads to economic convergence
“Monetarists”:
like France, Belgium and Luxembourg believe that monetary integration will naturally push the Member States’ economies towards greater uniformity
money is a primary factor in determining inflation/deflation in an econo
When did the Bretton Woods system by US end?
1971, leading to creation of currency snake
When was the currency snake created?
1972: : allowing the currencies of the Member States to be allowed to fluctuate against each other within a margin limited to 2.25%, others states currencies are allowed to peg one another
Pegged Currency
currency value is controlled so that it stays at a particular level in relation to another
What led to the failure of the currency snake?
1973, oil crisis
(OPEC) begins restricting oil exports to much of the Western world
Which countries joined the EU in 1993?
Denmark, Ireland, and the United Kingdom
What was the significance of the 1969 Hague Summit in the context of European integration?
The 1969 Hague Summit relaunched European integration, tasking Luxembourg’s PM Pierre Werner with drafting a plan for economic and monetary union to address Bretton Woods’ breakdown.
Who was Pierre Werner, and what was his contribution to European integration?
Pierre Werner was Luxembourg’s Prime Minister and Minister of Finance. In 1969, he was tasked with drafting a plan to establish an economic and monetary union for Europe, which became the foundation for the common European currency.
What was the purpose of the Werner Report of 1970?
proposed the gradual replacement of national currencies with a common European currency
What were the key conditions set out in the Werner Report for achieving an economic and monetary union?
- Stronger coordination of economic policies
- Free movement of capital
(unified monetary policy leading to the European Central Bank) - Fixed exchange rates and common systems of central banks
What was the long-term impact of the Werner Report on the European Union?
drafted a plan for the implementation of the EMU
Blueprint for monetary union and economic convergence
What long-term impact did the European Monetary System (EMS) have on European integration?
introduction of the euro in 1999
led to creation of EMU
Who proposed the 1978 European Council Copenhagen?
Chancellor Helmet Schmidt and the French President Valery Giscard d’
The European Monetary System (EMS)
an adjustable exchange rate arrangement set up in 1979 to foster closer monetary policy cooperation between members of the European Community (EC).
When does EMS enter into force ?
1979-1999
What are the two keys of EMS?
- Virtual ‘European currency unit’ (ECU) replaces the dollar
- Exchange rate mechanism based on fix but adjustable rates fluctuate by 2.25% above and below central rate
1986- European Act
creating a single currency (the euro)
1989- Delors Report:
committee led by President of the European Commission, Jacques Delors, proposes three stages for the implementation of the Economic and Monetary Union (EMU)
Which EU member is still reluctant to give up its strong currency?
Denmark
1992- Maastricht Treaty
creation of the European Union
Stage 1
Which country rejected the Maastricht Treaty?
Denmark
How many countries joined in 1998 and became eligible to join the monetary union on the basis of the convergence criteria?
11: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Spain, Portugal, Luxembourg, and Netherlands
Who didn’t fulfil the requirements and who opted out?
-UK and Denmark: obtained opt-outs
-Greece and Sweden: don’t fulfill conditions to join
What’s the convergence criteria to join the EU?
- Exchange rate stability
- Limits to public finances and debt
- Durable convergence
- Price stability (low inflation)
When did Euro coins and banknotes officially started to circulate?
January 1, 2002
Stage three
advantages of the EURO
- Reduces exchange rate risks for European companies.
- Lowers borrowing costs for governments and businesses.
Purpose of the EURO
promote growth, stability, and economic integration in Europe.
dominate the power of the dollar
Whats the central bank of the EU?
European Central Bank
What are the challenges preventing the euro from overtaking the dollar globally?
- Limited use in commodities markets (e.g., oil, which is priced in dollars).
- A lower share in foreign-exchange reserves compared to the dollar.
- Reliance on the dollar during economic crises undermines confidence in the euro’s stability.
What are the advantages of the euro for European companies and governments?
- For European Companies: The euro reduces exchange rate risks, simplifying trade and financial transactions within the eurozone.
- For Governments and Businesses: It lowers borrowing costs by providing access to a large, stable currency market.
Who issued bonds to support EU economies during the pandemic?
Next Generation EU
When did the UK leave the EU?
2016, under Brexit Vote
What are the Main Currency Systems?
- Free flow
- Managing floating exchange rate
- Semi-fixed currency (crawling peg)
- Fully-fixed exchange rate (hard peg )
- Currency board system (hard peg)
What is Purchasing-Power Parity (PPP)?
Big Mac Index: invented by The Economists in 1986
- the notion that in the long run exchange rate should move towards the rate that would equalize the prices of an identical basket of goods and services in any two countries
What is used instead of the Big Mac Index and Why?
GDP-per-Person: capita provides a more accurate picture of a country’s economic capacity and currency value. This version considers factors like income levels and economic productivity, which influence currency value more directly than consumer price differences.
What are some limitations of the Big Mac Index?
is too simplistic for currency speculation because it doesn’t account for economic complexities like wage levels, productivity, inflation, and broader economic stability.
Dollar System
network of global trade, finance, and debt predominantly conducted in U.S. dollars
The dollar is the most widely used currency in international transactions
free-floating currency
Dollar Power
refers to the dollar’s capacity to influence global economics through its dominant role in trade, finance, and monetary policy, often reinforcing the U.S.’s economic influence worldwide
What was the new fluctuation range set for remaining countries in the European Monetary System after the 1992 crisis?
15% above and below the central
rate
What resource made Potosí, South America, critical to Spain’s wealth in the colonial period?
Silver
Which act created the Bank of Canada?
The Bank of Canada Act of 1935
Why was the Bank of Canada created?
To combat the effects of the Great Depression
What does the Canadian Deposit Insurance Corporation (CDIC) do?
Insures individual bank deposits up to $100,000
What is the term for a sudden withdrawal of funds by depositors that destabilizes a bank?
Bank Run
What major event prompted the establishment of central banks globally?
The Panic of 1907
What year did Canada move off the gold standard?
1931
What was the main purpose of the Porter Commission,1961?
To assess and modernize the Canadian banking system
What significant change did the Porter Commission recommend regarding mortgages?
To allow banks greater access to the mortgage market
Which act implemented the recommendations of the Porter Commission?
Bank Act of 1967
What was one criticism of the conservative Canadian banking structure before the Porter Commission?
It was overly restrictive and hindered competition
How did the Porter Commission’s recommendations impact financial competition in Canada?
A) It increased competition by allowing more market participation.
What international monetary system ensured stability before European monetary cooperation became pressing?
Bretton Woods System
What led to the failure of the ‘currency snake’ system established in 1972?
Oil crisis and uncoordinated responses by member states
What currency replaced the dollar as the pivot of the European Monetary System?
European Currency Unit (ECU)
What crisis in 1992 threatened the Maastricht Treaty and monetary union?
The rejection of the treaty in a Danish referendum
What major event influenced Germany’s decision to support the monetary union?
The fall of the Berlin Wall in 1989
