INR2002 FINAL EXAM STUDY GUIDE 1 National monetary systems and public goods National Monetary System allows for the convenient exchange of goods services and capital It is a classic public good it benefits everyone but because people cannot be excluded form its benefits and charged for them there is little incentive for private firms to provide it 2 Exchange rates appreciate and depreciate Exchange Rate The price at which one currency is exchanged for another Appreciate when the dollar goes up in value against another country Ex A dollar can buy more pesos Depreciate when the dollar goes down in value against another country s currency weakens Ex a dollar can buy fewer pesos 3 What leads to changes in exchange rates X rates Supply and Demand Interest Rates Higher interest rates make it more profitable for people to or keep their money in the country so higher interest rates increase the demand for the currency and lead to its appreciation Lower interest rates lead to its depreciation 4 Monetary policy An important tool of national governments to influence broad macroeconomic conditions such as unemployment inflation and economic growth Typically gov t alters monetary policy by changing national interest rates or exchange rates 5 Different x rate systems fixed v floating Fixed Gov t promises to keep value of money constant in terms of another currency precious metal Gold Favored by those with INT concern Floating Value of currency determined by market factors Favored by those with domestic concern 6 Bretton Woods and the adjustable peg The Bretton Woods Monetary system which followed the classic Gold Standard was a compromise between gold standard rigidity and complete unpredictability It was based on a fixed rate and a Gold Standard for the US as a Fixed but adjustable rate for other currencies on a dollar standard Adjustable Peg Fixed but adjustable rates requires the gov ts keep currencies fixed for relativly long periods but permitted them to alter them if and when govts found it desirable to do so 7 Why governments care about x rates Because it affects the economy Fixed rate eliminates a gov ts ability to have its own independent monetary policy A floating exchange rate give the gov t more freedom to pursue its own monetary policies BUT floating exchange rates can move around a great deal which can impose costs on those engaged in INT trade and investment 8 Why consumers and business care about x rates Those whose economic activities are usually domestic are likely to favor a floating exchange rate while those with INT concerns favor a fixed system A strong exchange rate allows for consumers and others to buy more of the worlds products BUT it makes domestic goods more expensive to foreigners which harms national producers A weak exchange rate reduces national purchasing power making consumers worse off Strong currency helps consumers tourists while hurting producers A weak currency helps producers and hurts consumers 9 International monetary systems as a public good Everyone benefits no one can be excluded 10 International monetary regimes two principal features 1 Whether currency values are expected to be fixed floating or a mix of both 2 Agreement about whether there will be a mutually accepted benchmark against which values are measured some common base to which currencies can be compared such as Gold 11 The Gold Standard Currencies back by gold with exchange rates that did not change common currency for the entire world Pro currency stability helped facilitate growth i an INT trade and investment Con constrains domestic policy autonomy 12 The Wizard of Oz The story which was written during the height of the US experience under the gold standard reflects the highly politicized debates over monetary policy in the late 1800s Dorothy Naive american people Scarecrow Farmer Tinman Industrial worker Lion WJBryan Wizard McKinley Slippers were silver 13 The Bretton Woods system The Bretton Woods Monetary System Organized around the US and the was tied to gold at the rate of 35 oz and all other currencies were fixed to the US US is key reserve currency 14 Today s system INT monetary relations have been based on floating exchange rates among small number of major currencies typically those of the principal industrial and financial nations especially the US Japan Germany GB More national monetary autonomy to each gov t but still must cooperate in times of crisis 15 Why is development hard to achieve 1 Within the nation Domestic factors All answers to development lie within your own country 2 Outside the nation INT factors Poor countries can develop within the current INT system dominated by the rich Geography domestic factors domestic institutions 16 Geographic location Tropic regions are generally poor suggest that geography and climate affect development indirectly directly Landlocked countries regions with diseases that are difficult to control or cure and areas that are very far from major markets for their goods are all at a developmental disadvantage while the climate and geography of a nation shape its development they do so by the way of their impact on the people social structures politics and policies of the nation 17 Geographical determinism Is the theory that the human habits and characteristics of a particular culture are shaped by geographic conditions 18 Domestic factors Interests interactions and institutions that can speed or impede economic growth Some countries can lack technological expertise to manage modern economic growth and self serving groups whose goal conflicts with those of the rest of society can significantly impede development 19 Government policies have a powerful impact on economic growth Provide public goods Physical infrastructure Roads airports ports communication networks Economic institutions Financial and banking systems Social Infrastructure Public health education Judicial institutions Rule of law secure property rights Development more likely if gov t can provide its people with credible commitments that it will provide public goods 20 Infrastructure Basic structures needed for social activity such as transportation and telecommunications networks and power and water supply Gov ts can undertake this to boost development 21 Long term economic growth requires a stable and reliable environment within which people can make plans for the future A gov t that invests in education and public health creates an efficient economic infrastructure and
View Full Document
Unlocking...