week 1: history of financial crisis Flashcards
Why was the federal reserve system established?
in response to the banking crisis
1989: there were _____ bank failures.
534
2010: ____ bank failures
157
difference between 1989 vs 2010 bank failures
In 1989, many banks that failed were small
But in 2010, some very large banks failed.
when was BLACK MONDAY?
19th Oct 1987
what happened on black monday? ‘87
One of the most significant stock market crashes in history.
stock market bubble crashed
what happened in asian financial crises (late 1990s)
For a v. short period time, all of these Asian currencies collapsed:
Indonesia
Malaysia
Thailand
Korea
Phillipines
What is Barter?
Barter is the exchange of goods + services for other g+s
What is the main problem with bartering?
It requires a double coincidence of wants
i.e., if I want an apple for an orange, I first must find someone who wants an orange AND is selling an apple
Barter also requires the establishment of __________________
Too many prices.
e.g., if we have $n$ goods, we could have up to $n(n-1)/2$ prices.
How does n(n-1)/2 work?
In a barter system, goods are directly exchanged for other goods without using money. Now, imagine you have
𝑛 different types of goods available for exchange.
To establish fair exchange rates between all these goods, you need to determine the relative value of each good compared to every other good. For example, if you have 3 goods (let’s call them A, B, and C), you need to establish the exchange rates for A:B, A:C, and B:C.
For n goods, the number of possible pairwise exchanges (exchange rates) can be calculated using the formula:
Number of pairwise exchanges
= 𝑛(𝑛− 1 )/2
Let’s break down the formula:
n represents the number of different types of goods available.
(𝑛 − 1) represents the number of other goods each good needs to be compared with (excluding itself).
Dividing by 2 eliminates double counting because the exchange rate for A:B is the same as B:A.
For example, if you have 4 goods, the number of pairwise exchanges needed would be:
[4×(4−1)]/2
= (4×3)/2
=12/2
=6
So, in a barter system with 4 goods, you would need to establish 6 different exchange rates to facilitate trading efficiently.
As the number of goods increases, the number of pairwise exchanges (and thus the number of prices that need to be established) grows rapidly, making the barter system increasingly complex and impractical compared to using a single standardised medium of exchange like money.
what is the diagram of monetary exchange of establishment of too many prices
what’s the solution to having too many prices?
To establish a generally accepted commodity as a medium of exchange that also serves as the unit of account (numeraire)
As long as all parties agree to the arrangement, then the seller only needs to find someone ____________ + is in possession _____________.
seller only needs to find someone willing to buy their goods + is in possession of the medium of exchange
having an accepted commodity of exchange means that only ___ prices are needed
n -1