Lecture 7 & 8

Question 1

What are hard and soft currencies?

Answer 1

Hard: can be traded directly into (almost) any hard other currency
Soft: You need to acquire a hard currency to trade

Question 2

What are the six things that affect the value of currencies?

Answer 2

1. Hard/Soft
2. Appreciation/depreciation
3. Exchange rate manipulation
4. If it is fixed to another currency
5. Interest rates and inflation
6. Speculation

Question 3

How do countries usually react to under/overvalued currencies?

Answer 3

Undervalued: Usually seen as good, since it makes your exports seem cheaper and thus incentivizes your export market. Though it makes importing more difficult.

Overvalued: Does make imports (such as food) cheaper, but it also makes a countries exports less competitive

Question 4

What is hot money?

Answer 4

Money that is moved quickly in and out of a country. This money can create price bubbles that could burst when investors pull their money out again.

Question 5

What are the three foreign exchange rate systems?

Answer 5

1. Gold standard
2. Fixed exchange rate system
3. Flexible/Floating exchange rate sytem

Question 6

What was the gold standard system? How did countries respond when GDP fell?

Answer 6

Most currencies were pegged to some weight in gold, when countries experienced a balance of payments deficit, then by selling some of its gold, raising intrest rates and cutting government spending, countries would attract international investors again and thus reduce the deficit.

Question 7

Why did the gold standard stop?

Answer 7

After WW1 Great Britain could not maintain their reserves of gold (because they borrowed a lot). Hegemonic stability theorists believe that the US failed to take appropiate action and thus then contributed to the severity of the great depression.

Question 8

Why do hetrodox liberals dislike the gold standard?

Answer 8

• Governments were often pressured in not taking the appropriate action
• Some states preferred to depreciate their currencies to stimulate exports
• Many states implemented capital controls

Question 9

How did the Bretton Woods system work? What did this system allow countries to do?

Answer 9

The US promised that 1 ounce of gold could be traded into $35. Other countries then pegged their currency to the US dollar, so that they would also be pegged to gold. These valuations were fixed and central banks had to maintain the respective pegged value.

The IMF was created to help countries that got in trouble.

This allowed countries to maintain capital controls and the US dollar to become the world main reserve currency.

Question 10

Why did the Bretton Woods system fail?

Answer 10

• Europeans increasingly critized the US for printing extra dollars
• Western-Europes recovery would mean that its currency would appreciate, but because exchange rates were fixed it was impossible to change.

Question 11

How did the Bretton Woods system fail?

Answer 11

In 1971 Nixon unilatterly decided that US dollars could not be converted to gold anymore, and added a 10% surcharge on all Japanese imports.

Question 12

Who is blamed for the failure of the Bretton Woods system?

Answer 12

The Americans blame the Europeans because they did not buy enough American goods.

The Europeans blame the Americans for not reducing government spending.

Question 13

What system was implemented after the failure of the Bretton Woods system?

Answer 13

A managed float system, where currencies are allowed to trade in wide trading bands so that market forces could more easility determine changees in currency values. Many in the EEC coordinated their policies regionally.

Question 14

What did Reagan and Tatcher implement in the 1980’s?

Answer 14

Neoliberal policies such as privatization and deregulation.

Question 15

What happend in the 1990’s and into the early 2000’s regarding international economic policy?

Answer 15

More of the “Washington Consensus”, more globalization, removal of capital controls.

Question 16

What was the “Peso Panic” and the Asian Financial Crisis?

Answer 16

Countries that experienced economic bubbles because of fixed exchange rates.

Question 17

What was the cause of the 2007 financial crisis?

Answer 17

Banks offered subprime morgages to borrowers who could not afford it. They combined these into financial products which failed. Then the investment bank Lehman Brothers failed, which shocked the entire US financial system. The US government had to save many important companies and used Quantitative Easing to get the economy back in shape.

Question 18

What were the lessons taken from the 2007 Financial crisis?

Answer 18

• Austirity measures weaken demand
• Government deficit spending boosts demand and creates jobs
• Moderate inflation is not a problem in the short run
• Increased state investments in education, infrastructure and renewable energy produce more long-term growth
• The wealthy and major corporations should be forces to pay higher taxes

Question 19

What happend to the supremacy of the dollar after the financial crisis?

Answer 19

It was doubted, many countries wanted to switch to a basket of different currencies for OPEC but Saudi-Arabia stopped it.

Question 20

Why was the G7 and the G20 created?

Answer 20

G7: After Nixon ended convertitiblity of the dollar into gold in 1971 to coordinate economic and monetary policy

G20: After the 2007-2008 financial crisis to account for the new economic importance of other countries.

Question 21

Will any other currency overtake the dollar soon?

Answer 21

No this is quite unlikely

Question 22

What do mercantilists and realists believe about the creation of the IMF?

Answer 22

To create a stable international monetary for the great powers

Question 23

What was the Keynesian compromise?

Answer 23

Allowed individual nation-states to contiune regulate domestic economic activities within their own geographic borders.

Question 24

What did Keynes believe about debt when debtors are not able to repay?

Answer 24

That creditors should also share a part of the loss.

Question 25

What do structuralists believe about the Bretton Woods institutions?

Answer 25

That they were created to endorce the policy preferences of the great powers expecially the US.

Question 26

Who believed that the “bargain” that Bretton Woods was slowly became unstuck?

Answer 26

Benjamin Cohen

Question 27

What did Simon Honson and James Kwak point out regarding the six megabanks?

Answer 27

That they spend huge amounts of money to oppose regulation

Question 28

What were according to Echergreen the mose widel considered replacements for the the US dollar?

Answer 28

• The Euro/Yuan
• A supranational currency s.a. the Special Drawing Rights (SDR’s)
• A basket of currencies and/or gold

Question 29

How does the Balance of Payments work? What are the official reserves?

What are its two main components

Answer 29

Question 30

What happens if a country cannot pay for its trade deficit?

What are the two different options? On what does it depend?

Answer 30

Question 31

What is the Mundell Trilemma/impossibility theorem?

Answer 31

Question 32

What do fixed exhange rates often require? What are some of these examples?

Answer 32

Question 33

What is Keynes perspective on the role of finance?

Answer 33

Question 34

What is the status of the US dollar after the Bretton Woods system? What is this called? What are some advantages?

Name 4 advantages

Answer 34

Question 35

What enabled financial globalization?

Name four

Answer 35

Question 36

What was the cause of the financial crisis?

Answer 36