SISU 300 - International Economics

Flashcards for International Economics review based on lecture notes, covering topics like the Trilemma, exchange rates, and monetary policy.

The Trilemma (Impossible Trinity)

fixed exchange rate, capital mobility, and monetary policy autonomy.

Exchange Rate Overshooting

Short-run exchange rate deviates from long-run equilibrium due to sticky prices, explaining high short-term volatility.

Current Account (CA) Identity

Formula: CA = S - I; Surplus: Savings > Investment; Deficit: Investment > Savings

Twin Deficits

When a government budget deficit coincides with a current account deficit.

National Savings

Breakdown: Private Savings + Government Savings where Private Savings = Y - C - T and Government Savings = T - G

Gold Standard

A monetary system where a country's currency is directly tied to a fixed amount of gold, resulting in automatic fixed exchange rates.

Bretton Woods System

A monetary system where the USD was pegged to gold, and other currencies were pegged to the USD.

Inflation Tax

When a government prints money, reducing the real purchasing power of the currency.

Original Sin

A country's inability to borrow in its own domestic currency.

Liability Dollarization

Debt in USD that makes currency depreciation dangerous.

Interest Rate Channel

Decrease in interest rates leads to increased investment, which leads to increased GDP.

Exchange Rate Channel

Decrease in interest rates leads to decreased currency value, which leads to increased exports.

Historical Examples of the Trilemma

Instances in which countries have faced challenges balancing monetary policy, exchange rate stability, and capital mobility. Examples include the 1997 Asian financial crisis and the 2008 global financial crisis.