Global Capital Markets Flashcards
How do Global financial markets constrain the governement
the government has to make sure the bond market can support its debt, govt wants low I-rates but could cause inflation
What are some benefits of having the dollar as the reserve currency
it helps the GOvt run bigger debts an might support an internationalist FP that the public is unwilling to support
What are the 3 main functions o fmoney
1) serve as a medium of exchange
2) serve as unit of account
3) serve as a store of value (facilitating savigs and investment)
what kind of I-rates to politicians like
low rates
What is monetary policy
govt efforts to influence $ outcomes: inflation, I-rates, Money supply, exchange rates
What are the three main tools the Fed has
1) reserve requirements
2) discount rates (Irate the Fed charges banks)
3) OMO (ex: Quantitative Easing)
How does the US solve the fundamental prom=blem of politics with the GOvt needed to regulate money but officials have an incentive to screw it up
they give the Federal Reserve to an unelected official
What is inflation, why is it bad, what is deflation, why is it bad
inflation is rising prices, bad b/c erodes value
deflation also bad b/c everybody will wait to buy things if prices are falling
WHat is the Optimum level of inflation and what can govts to to kill inflation
2% and hike rates
What is the main organization that limits inflation
An independent Central BAnk ie FED
What are some characteristics of the US FED
Central bank, regulates banking sector, lender of last resort, serves as the banks’ bank but doesn’t care about making $, policy goals of employment and limit inflation
How does the fed influence short term and long term rates?
short term rates with discount rate
long term rates with OMOs
Describe the market for US Treasury Bonds
very big market
so dependable people use them like cash ut better because they pay interest
These bonds help make the dollar the reserve currency which in turn allows the US GOvt to run big deficits
What is the Trifflin Delimma
The global economy is growing and needs an expansion of money suppy to facilitate global commerce and the world gets this expansion in MS via US GOvt debt
What are some problems with answering the Trifflin Delimma by going futher into debt?
How much credit will the world give the US, too much MS means inflation (worries china), this is sustainable as long as ppl continue to lend money to the treasury
What are the two key factors in exchange rates?
Intereest rates and the expected change in exchange rates
Why are exchange rates so important
strong currency means more imports and less exports
weak currency means more exports and less imports
US-China Exchange rates
China likes strong dollar b/c they like to export and they have lots of dollars, they also push up the value of the dollar by buying Trasuries and Mortgage backed securities
They have NO incentive to sell the dollars they have
How do international capital markets discipline countries
if investors lose confidence in a country they sell bonds, devaluing currency, forces govt to raise I-rates to prevent inflation, high I-rates put ppl out of work and hurts economy
What is the Brentton Woods Economic Order
the current state where international trade is stabilized by a bunch of international orgs like the GATT/WTO, IMF, World Bank
What is the IMF
the International Monetary fund that tries to limit exchange rate fluctuations and serves as the lender of last resort (demands changes from these countries demanding loans) Stable exchange rates help intl commerce
Where is the Power of the IMF
it is the one who will lend when nobody else will so it can force conditions on these countries that will eventually make this country attractive to intl investors
What is the US/IMF relationship
US is the biggest contributor and therefore has the largest say in who gets what terms, US relaxes terms for strategic reasons ie Pakistan
