Global Capital Markets

Question 1

How do Global financial markets constrain the governement

Answer 1

the government has to make sure the bond market can support its debt, govt wants low I-rates but could cause inflation

Question 2

What are some benefits of having the dollar as the reserve currency

Answer 2

it helps the GOvt run bigger debts an might support an internationalist FP that the public is unwilling to support

Question 3

What are the 3 main functions o fmoney

Answer 3

1) serve as a medium of exchange
2) serve as unit of account
3) serve as a store of value (facilitating savigs and investment)

Question 4

what kind of I-rates to politicians like

Answer 4

low rates

Question 5

What is monetary policy

Answer 5

govt efforts to influence $ outcomes: inflation, I-rates, Money supply, exchange rates

Question 6

What are the three main tools the Fed has

Answer 6

1) reserve requirements
2) discount rates (Irate the Fed charges banks)
3) OMO (ex: Quantitative Easing)

Question 7

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

Answer 7

they give the Federal Reserve to an unelected official

Question 8

What is inflation, why is it bad, what is deflation, why is it bad

Answer 8

inflation is rising prices, bad b/c erodes value

deflation also bad b/c everybody will wait to buy things if prices are falling

Question 9

WHat is the Optimum level of inflation and what can govts to to kill inflation

Answer 9

2% and hike rates

Question 10

What is the main organization that limits inflation

Answer 10

An independent Central BAnk ie FED

Question 11

What are some characteristics of the US FED

Answer 11

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

Question 12

How does the fed influence short term and long term rates?

Answer 12

short term rates with discount rate

long term rates with OMOs

Question 13

Describe the market for US Treasury Bonds

Answer 13

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

Question 14

What is the Trifflin Delimma

Answer 14

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

Question 15

What are some problems with answering the Trifflin Delimma by going futher into debt?

Answer 15

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

Question 16

What are the two key factors in exchange rates?

Answer 16

Intereest rates and the expected change in exchange rates

Question 17

Why are exchange rates so important

Answer 17

strong currency means more imports and less exports

weak currency means more exports and less imports

Question 18

US-China Exchange rates

Answer 18

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

Question 19

How do international capital markets discipline countries

Answer 19

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

Question 20

What is the Brentton Woods Economic Order

Answer 20

the current state where international trade is stabilized by a bunch of international orgs like the GATT/WTO, IMF, World Bank

Question 21

What is the IMF

Answer 21

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

Question 22

Where is the Power of the IMF

Answer 22

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

Question 23

What is the US/IMF relationship

Answer 23

US is the biggest contributor and therefore has the largest say in who gets what terms, US relaxes terms for strategic reasons ie Pakistan