Lecture 1 Flashcards
What is and why did the Gold Standard (1879-1913) monetary system break down?
The value of currency is linked to gold. The value of one dollar was worth X amount of weight in gold. Fixed exchange-rate system. The most important rule: central banks should only be allowed to increase money supply if they got access to more gold. Outbreak of first world war: expand expenditure of military -> governments started printing more money without more gold, which made the gold standard collapse.
What is and why did the Bretton Woods (1945-1971) monetary system break down?
Hyper-inflation in Germany. Wall Street crash -> deep recession (The Depression). Triggered the WW2. After WW2: Bretton Woods system. A dollar system where all currencies and their value are linked to the dollar - fixed exchange-rate system. IMF was created together with the World Bank to control the world-economy. Collapsed when the US suspended the fixed exchange-rate between dollar and gold, and since then it has been floating exchange-rate system (supply/demand).
Why is Spain still in a economic recession?
High unit labour costs, low prod. growth, high debt (84%), 6,6% gov deficit. 26% (high) unempl and 50% youth unempl.
Which countries does PIIGS refer to? And what is their problem?
Portugal, Italy, Ireland, Greece, Spain. High debt and lower productivity growth than in Germany and Northern Europe
How does the difference in unit labor cost between Germany and the PIIGS create problems?
Germany has much lower unit labor costs and is therefore much better positioned to compete in comparison to PIIGS. Because both have the Euro, the PIIGS can’t devalue their currency to make them more competitive.
Why is it said that the Euro is a monetary system not in balance?
Differing unit labor costs between Germany and PIIGS creates a gap that makes it increasingly more difficult for PIIGS to compete. Before the Euro, the local currencies would just devalue.
What is the current economic status in the Eurozone?
Mr. Draghi said “We will do whatever…” to save the Euro. Key to medium and long-term survival is Spain and Italy.
What is happening to Spain’s debt burden?
It is accelerating: ∆(B/Y)=[G-T]/Y+r-g -> 3.5%+0.05+0.015=8.9%. So debt increase by 8,9% in 2013. Will have to bring deficit down to 3% which could lead to lower GDP and higher unempl.
What happens if Spain and Italy collapse?
The Euro collapses with them and so does a lot of European banks. This is because Germany will not be able to cash them out like with Greece because they are too big.
What is the current US monetary policy?
They are buying mortgage bonds for 85 bn dollars every month - maybe tapering will begin sometime next year in Q1. Policy interest rates very low. The ”tapering discussion” has led to interest rate increases and stock market volatility, and to capital outflows from EMs (emerging markets), which leads to higher EM interest rates.
What is the current status in Italy?
Very high debt - recent 2012 number is saying 125% of GDP. But they have low gov deficit. They are in a recession (negative growth). It is important to avoid increases in interest rates (i). If the government resorts to populist policies (giving gifts to the people) the markets will punish by selling bonds which will increase i.
How big is Germany relative to the Eurozone in economic size?
One third. It is said that Germany is pulling the Eurozone out of the crisis.
What determines changes in unit labor costs?
Increases if labor costs rise or if efficiency goes down.
What does Okun’s Law show?
The relationship between an economy’s unemployment rate and its GDP. 2% increase in output = 1% decline in unemployment rate. Thus, you need a lot of growth to bring fx. Spain’s 26% unemployment rate down.
The change in the debt-to-GDP ratio, denoted ∆(B/Y), is shown in what formula?
∆(B/Y) = [G-T]/Y + r-g. Where [G-T]/Y equals primary deficit in % of GDP and [r-g] is the interest rate minus the economy’s growth rate.
