MGMT 1035 Week 9

Question 1

What is Money?

Answer 1

Money is any generally accepted medium of exchange that enables a society to trade goods without barter; it includes objects or tokens regarded as a store of value.

Question 2

What are the types of Money?

Answer 2

1. Commodity money: gold, silver, shells, grain.
2. Token Money: coins or paper exchangeable for gold or silver (e.g., gold standard).
3. Fiat money: government-issued money not backed by a commodity.

Question 3

What was Potosi’s significance?

Answer 3

Potosi was the first city of capitalism, supplying the primary ingredient of capitalism - money.

Question 4

How did the influx of silver impact global economies?

Answer 4

The influx of silver from South and Central America changed economies, facilitating a transition to cash and altering trade dynamics, particularly with China.

Question 5

What is a Bank?

Answer 5

A bank is a financial institution that accepts deposits, makes loans, and manages currency.

Question 6

When was the Bank of England established?

Answer 6

The Bank of England was formed in 1694 to raise money for the government.

Question 7

What is the Federal Reserve?

Answer 7

The Federal Reserve, created in 1913, centralizes control of the monetary system in the USA and regulates banks.

Question 8

What is the Bank of Canada?

Answer 8

Established in 1935, the Bank of Canada controls the monetary supply and was initially influenced by private interests before federal control.

Question 9

What are Chartered Banks in Canada?

Answer 9

Chartered banks take deposits and make loans, operating under federal government-issued charters.

Question 10

What was the impact of the Home Bank Failure in 1923?

Answer 10

The Home Bank Failure led to stronger banking regulations in Canada, crucial during the Great Depression.

Question 11

What is the euro?

Answer 11

The euro is a common EU currency used by many EU members, representing differentiated integration.

Question 12

What was the Bretton Woods system?

Answer 12

The Bretton Woods system anchored post-WWII stability by tying European currencies to the dollar.

Question 13

What is the NGEU?

Answer 13

The NGEU is a bond issuance scheme by the EU aimed at economic recovery post-COVID-19, creating a ‘safe asset’ for investors.

Question 14

What are the different exchange rate systems?

Answer 14

1. Free Floating: determined by market forces.
2. Managed Floating: central bank intervenes occasionally.
3. Semi-Fixed: fluctuates within set bands.
4. Fully Fixed: pegged to another currency.
5. Currency Board: fully backed by foreign reserves.

Question 15

What challenges does the U.S. dollar face?

Answer 15

Countries like China and Russia are exploring alternatives to the dollar, but these efforts lack the scale to compete meaningfully.

Question 16

What is the risk for developing countries regarding dollar-denominated debt?

Answer 16

Developing countries face heightened risks of default due to rising rates and commodity prices, with many at risk of debt distress.

Question 17

What sustains the dollar system?

Answer 17

The dollar system is sustained by the strength of the U.S. economy, financial market resilience, and coordination with other central banks.

Question 18

What percentage of low-income borrowers are at risk of debt distress?

Answer 18

60% of low-income borrowers are now at risk of debt distress, with some, like Sri Lanka and Argentina, already in crisis.

Question 19

What sustains the dollar system despite vulnerabilities?

Answer 19

The dollar system is sustained by the U.S. economy’s strength, financial market resilience, and public-private partnerships.

Question 20

How does the Fed support the dollar system during crises?

Answer 20

The Fed’s coordination with other major central banks supports the system during crises.

Question 21

What does the dollar’s dominance mean for global economies?

Answer 21

Global economies remain highly susceptible to shifts in U.S. monetary policy.

Question 22

What is the purpose of the Big Mac Index?

Answer 22

The Big Mac Index is a lighthearted tool designed to assess whether currencies are fairly valued against the U.S. dollar by comparing the price of a Big Mac burger across countries.

Question 23

What concept is the Big Mac Index based on?

Answer 23

The index is based on Purchasing Power Parity (PPP), which suggests that in the long term, exchange rates should adjust so that identical goods cost the same in different countries.

Question 24

What is a limitation of the Big Mac Index for currency speculators?

Answer 24

Speculators often focus on short-term exchange rate movements, which the index does not predict.

Question 25

What factors affect the accuracy of the Big Mac Index?

Answer 25

Local production costs and broader economic and market factors affect the accuracy of the index.

Question 26

What is a potential issue with a currency deemed undervalued by the Big Mac Index?

Answer 26

A currency deemed undervalued by the index might not appreciate as expected due to real-world financial and political factors.

Question 27

What are alternative uses of the Big Mac Index?

Answer 27

The index is valuable for understanding long-term economic trends and assessing global cost-of-living differences.

Question 28

What are some criticisms of the Big Mac Index?

Answer 28

The Big Mac is not a traded commodity and can oversimplify complex currency factors, leading to potentially misleading views of currency strength or weakness.