Frieden Lake and Schultz World Politics 2nd edition 2013 Exam 3 Review Sheet Note This review sheet covers only the chapters from FLS In addition the exam will cover all the lecture material since the last exam and the items in the Bb course materials folder Chapter 9 International Monetary Relations 1 National monetary systems and public goods A national monetary system allows for the convenient exchange of goods services and capital It is a public good because it benefits everyone but because people cannot be excluded from its benefits and charged for them there is little incentive for private firms to provide it 2 Exchange rates appreciate and depreciate The exchange rate is the price at which a national currency is valued relative to other national currencies If a currency appreciates the value increases in terms to other currencies If the currency depreciates the value decreases 3 What leads to changes in exchange rates x rates Relative interest rates are the most commonly used policy to affect exchange rates Higher interest rates make investing more profitable which creates a higher demand for the currency which in turn appreciates the currency due to growing demand for the currency Lower interest rates will lead to depreciation in the currency since the currency makes investment less profitable in turn lowering demand for the currency 4 Monetary policy Governments use monetary policy to impact economic conditions unemployment inflation economic growth and they attempt to do this by raising lowering interest rates Lower interest rates stimulate the economy by making it easier to borrow so that people and banks can spend to expand the economy Higher interest rates are used when prices rise and the concern for inflation comes about higher interest rates make it harder to borrow thereby restraining demand 5 Different x rate systems fixed v floating Fixed currency is kept at an established value in terms of another currency or valuable metal gold Floating currency value is allowed to change more or less freely driven by markets or other factors current U S D 6 Bretton Woods and the adjustable peg Bretton Woods The monetary order negotiated among the WWII allies in 1944 lasted till 1970s based on a U S D tied to gold Other currencies were fixed to the dollar but were permitted to adjust their exchange rates Adjustable peg a system in which governments kept currency values fixed for relatively long periods of time but allowed them to adjust policy if and when governments found it desirable to do so 7 Why governments care about x rates Governments care about their type of exchange when it comes to fixed or floating Fixed exchange rates help with international trade investment finance migration and travel Fixed exchange rates constantly maintain their value so that businessmen and investors have a monetary anchor that keeps prices stable Fixed exchange rates reduce the government s ability to implement monetary policies to influence the economy Floating exchange rates allow the government to seek it s own monetary policies as the government is not hampered by the need to keep the exchange rate fixed 8 Why consumers and business care about x rates Individuals such as consumers and small business who have economic activities that are entirely domestic likely favor a floating exchange rate they are indifferent to currency fluctuations and are concerned with the national currency value MNC s immigrants and wealthy individuals with overseas and international interest favor a fixed exchange rate because too much currency volatility interferes with their activities 9 International monetary systems as a public good Agreement on a monetary regime has many features of a public good everyone benefits if there is a smoothly functioning way to carry out international economic transactions However as with most public goods the provision of this monetary order is not automatic or easy It can be difficult to organize collaboration among governments to provide such a public good because there are incentives to free ride on the efforts of others 10 International monetary regimes two principal features The first principle identifies whether currency values are fixed floating or both The second principle defines whether there will be a mutually agreeable benchmark some common base or standard to which currencies are compared 11 The Gold Standard The gold standard provided currency stability at a fixed rate and required the cooperation of all the major financial powers Governments on the gold standard gave up their ability to implement monetary policy that would have affected their own countries economic conditions 12 The Wizard of Oz The symbolism in the Wizard of Oz reflects the political and cultural importance of different monetary systems Dororthy is American public Scarecrow is a farmer tin man is industrial worker lion is William Jennings Bryan and the Wizard is William McKinley 13 The Bretton Woods system Organized around the U S D the U S D was tied to gold at the fixed rate of 35 per ounce Other currencies were tied to the dollar and thus indirectly to gold but were permitted to adjust as necessary 14 Today s system The current system is not monolithic as was the gold standard or organized as was Bretton Woods but it does offer clear defining features Such as large countries typically allowing their currencies to float freely and smaller countries linking their currency to a larger nation or bloc of nations Chapter 10 Development 1 Why is development hard to achieve Steps to improve development threaten the interest of other actors domestically or internationally 2 Geographic location Geographical determinism Tropical regions are mostly poor temperate regions are wealthy hinting geography and climate may affect development directly or indirectly Does not explain the variation among regions and their geographical conditions but may play a minor role Domestic factors The domestic factors are interests interactions and institutions that enhance or obstruct economic growth 3 Government policies have a powerful impact on economic growth Government policies can speed or retard growth and government actions can usually explain development or underdevelopment in most countries An important policy governments utilize to boost development is providing public goods that contribute to economic growth and prosperity 4 Infrastructure Basic structures necessary for social activity such as transportation
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