Lecture 4 & 5

Question 1

Gold standard (1879-1913)
What where the features?

Answer 1

Fix an official gold price & allow free convertibility between money & gold at that price

Adjustment mechanism: Price Specie Flow

Characteristics of prices:
P of tradables equalized
Nominal exchange rates fairly constant Low inflation (but not so stable)

Question 2

What can the central bank do to deal with crisis under the Gold Standard?

Answer 2

Cannot really do anything because the money supply has to be backed by gold

Question 3

Bretton Woods (1945-71)
What where the features?

Answer 3

Dollar fixed against gold (& convertible at least for CBs)
Other currencies fixed against $ (+/- 1%)
Major devaluations … consult the IMF
Financial and capital account restrictions
Maintain balance on current account
High degree of policy independence

Question 4

What are the convergence criteria for EMU (5)

Answer 4

1) Budget deficits (3%)
2) Public debt (60%) not binding
3) CPI (inflation) not more than 1,5 %…
4) Long interest rates …2%
5) Exchange rate within band for the last 2 years

Question 5

Which 11 countries started with EUR initially on 1.1 1999?

Answer 5

Germany,Finland, France,Ireland, Netherlands, Austria, Belgium,Portugal Luxembourg,Spain, Italy

Question 6

Which 6 countries has joined the EUR later?

Answer 6

Estonia, Greece, Slovenia, Malta, Finland, Slovakia

Question 7

What where the origins of the Eurocurrency markets?

Answer 7

During the cold war, east europeans were afraid of depositing USD in the US (risk that the US would 28 block the accounts)

Question 8

Echange rates:

S

Answer 8

S=foreign currency per 1 $ (eg. 115 Yen/$). S up ($ appreciates)

Question 9

Echange rates:

R

Answer 9

Real exchange rate:
R = P_USA * S / P*
R=US prices in foreign currency/foreign prices
R up (real value of the $ appreciates; the US is losing competitiveness)
R is a measure of competitiveness