International Econ Final

What is the main challenge facing the Eurozone today?

Many countries violated the rules by running large budget deficits and accumulating too much debt after adopting the Euro.

Convergence Criteria: Government Debt

To join the Euro, total government debt must be no more than 60\% of GDP.

What does the European Central Bank (ECB) NOT do?

It does not finance the deficits of member countries.

Why did Britain leave the ERM in 1992?

The cost of keeping high interest rates (to match Germany) was causing a recession, which became too expensive to maintain.

Effect of leaving ERM on Britain's economy

The economy expanded because they could lower interest rates and their currency depreciated, making exports cheaper.

What is ERM II?

A system where countries must keep their currency within \pm 15\% of the Euro's value before fully joining the Eurozone.

What is the primary argument AGAINST a fixed exchange rate?

A country loses the ability to control its own money supply and interest rates (loss of monetary autonomy).

When is a fixed exchange rate considered a good idea?

When two countries are highly integrated (trade extensively) and experience similar economic shocks.

What is Seigniorage?

An "inflation tax" where a government prints money to pay for expenditures instead of taxing citizens directly.

Why do developing countries borrow in Dollars or Euros?

International lenders often lack trust in the history of the developing country's domestic money management.

What is a "Currency Mismatch"?

When a country owes debt in a foreign currency (e.g., USD) but earns income in its own currency (e.g., Pesos). If the home currency crashes, the debt becomes unpayable.

What was the Gold Standard?

A system where a currency's value was tied directly to a specific amount of gold; it dominated from 1870 to 1913.

What is a "Beggar-thy-neighbor" policy?

When a country devalues its currency to make exports cheaper, aiding itself at the expense of trading partners.

What is an "Indirect Peg"?

If two countries (e.g., Mexico and Canada) both peg to the same third currency (e.g., USD), they are indirectly pegged to each other.

China's Wealth Calculation: 10\% Depreciation

If China has more foreign assets than foreign liabilities, a depreciation in the exchange rate will cause their overall wealth to rise.

Argentina's External Wealth Calculation

Assets (\$10B) - Liabilities (\$100B) = External wealth of -90 billion (Net Debtor).

Canada: Farmer buys Japanese tractor with cash

This counts as a Current Account debit (import) and a Financial Account credit (asset trade).

Current Account Surplus vs. Deficit Status

A nation with a surplus is a net lender, while a nation with a deficit is a net borrower.

What is the Capital Account primarily used for today?

Debt forgiveness, confiscation of assets, and nonfinancial assets like copyrights.

Relationship: GNDI vs. GNE in a CA Deficit

Whenever there is a deficit in the current account, GNDI < GNE.

Investment vs. National Savings

If investment exceeds national savings (I > S), the current account must be negative.

IS Curve: Effect of G increases

An increase in government spending shifts the IS curve to the right.

LM Curve: Logic of Output Rise

With a fixed money supply, as Y (GDP) rises, money demand rises, causing the interest rate (i) to rise.

Long-run Effect of a Temporary Money Supply Expansion

GDP rises, interest rates fall, and the exchange rate rises (depreciation).

Crowding Out in Open Economies

Expansionary fiscal policy raises interest rates and appreciates the exchange rate, reducing private investment and net exports.

What is the "Inside Lag"?

The time elapsed between observing an economic shock and implementing a policy to counter it.

Fixed Exchange Rate & Expansionary Fiscal Policy

It raises interest rates and GDP, putting downward pressure (appreciation) on the exchange rate, forcing the central bank to undertake expansionary monetary policy.

GDP Calculation: C=400, I=150, G=80, X=210, M=60

GDP = C + I + G + (X - M) = 400 + 150 + 80 + (210 - 60) = 780.

Temporary conservative monetary policy shift

The exchange rate will appreciate in the short run and then return to its initial value.

Permanent 8\% increase in Money Supply

In the long run, the domestic currency will depreciate by exactly 8\%, and price levels will rise by 8\%.

Fixed Exchange Rate Constraints

A country with a fixed exchange rate faces monetary policy constraints in both the short run and the long run.

What is the main challenge facing the Eurozone today?

Many countries violated the rules by running large budget deficits and accumulating too much debt after adopting the Euro.

Convergence Criteria: Government Debt

To join the Euro, total government debt must be no more than 60\% of GDP.

What does the European Central Bank (ECB) NOT do?

It does not finance the deficits of member countries.

Why did Britain leave the ERM in 1992?

The cost of keeping high interest rates (to match Germany) was causing a recession, which became too expensive to maintain.

Effect of leaving ERM on Britain's economy

The economy expanded because they could lower interest rates and their currency depreciated, making exports cheaper.

What is ERM II?

A system where countries must keep their currency within \pm 15\% of the Euro's value before fully joining the Eurozone.

What is the primary argument AGAINST a fixed exchange rate?

A country loses the ability to control its own money supply and interest rates (loss of monetary autonomy).

When is a fixed exchange rate considered a good idea?

When two countries are highly integrated (trade extensively) and experience similar economic shocks.

What is Seigniorage?

An "inflation tax" where a government prints money to pay for expenditures instead of taxing citizens directly.

Why do developing countries borrow in Dollars or Euros?

International lenders often lack trust in the history of the developing country's domestic money management.

What is a "Currency Mismatch"?

When a country owes debt in a foreign currency (e.g., USD) but earns income in its own currency (e.g., Pesos). If the home currency crashes, the debt becomes unpayable.

What was the Gold Standard and when did it dominate?

A system where a currency's value was tied directly to a specific amount of gold; it dominated from 1870 to 1913.

What is a "Beggar-thy-neighbor" policy?

When a country devalues its currency to make exports cheaper, aiding itself at the expense of trading partners.

What is an "Indirect Peg"?

If two countries (e.g., Mexico and Canada) both peg to the same third currency (e.g., USD), they are indirectly pegged to each other.

China's Wealth Calculation: 10\% Depreciation

If China has more foreign assets than foreign liabilities, a depreciation in the exchange rate will cause their overall wealth to rise.

Argentina's External Wealth Calculation

Assets (\$10B) - Liabilities (\$100B) = External wealth of -90 billion (Net Debtor).

Canada: Farmer buys Japanese tractor with cash

This counts as a Current Account debit (import) and a Financial Account credit (asset trade).

Current Account Surplus vs. Deficit Status

A nation with a surplus is a net lender, while a nation with a deficit is a net borrower.

What is the Capital Account primarily used for today?

Debt forgiveness, confiscation of assets, and nonfinancial assets like copyrights.

Relationship: GNDI vs. GNE in a CA Deficit

Whenever there is a deficit in the current account, GNDI < GNE.

Investment vs. National Savings

If investment exceeds national savings (I > S), the current account must be negative.

IS Curve: Effect of G increases

An increase in government spending shifts the IS curve to the right.

LM Curve: Logic of Output Rise

With a fixed money supply, as Y (GDP) rises, money demand rises, causing the interest rate (i) to rise.

Long-run Effect of a Temporary Money Supply Expansion

GDP rises, interest rates fall, and the exchange rate rises (depreciation).

Crowding Out in Open Economies

Expansionary fiscal policy raises interest rates and appreciates the exchange rate, reducing private investment and net exports.

What is the "Inside Lag"?

The time elapsed between observing an economic shock and implementing a policy to counter it.

Fixed Exchange Rate & Expansionary Fiscal Policy

It raises interest rates and GDP, putting downward pressure (appreciation) on the exchange rate, forcing the central bank to undertake expansionary monetary policy.

Temporary conservative monetary policy shift

The exchange rate will appreciate in the short run and then return to its initial value.

Permanent 8\% increase in Money Supply

In the long run, the domestic currency will depreciate by exactly 8\%, and price levels will rise by 8\%.

Fixed Exchange Rate Constraints

A country with a fixed exchange rate faces monetary policy constraints in both the short run and the long run.

Demand for Real Money Balances Relationship

For a given level of real income, the demand for real money balances is inversely related to the nominal rate of interest (i).

The Fisher Effect

Creates a link between inflation rates (\pi) and nominal interest rates (i).

Cost of Holding Money

The nominal interest given up by not channeling currency into savings or interest-bearing assets.

Real Interest Rate Formula

The real interest rate (r) is equal to the nominal interest rate (i) minus inflation (\pi): r = i - \pi.

Impact of Liquidity Preference on the Simple Model

Changes in money supply growth cause inflation and nominal interest rates to change, which affects demand for real balances and creates discontinuous influences on price levels.

Nominal Anchors: Real Money Demand

Real money demand measures are not useful as a nominal anchor for controlling domestic inflation.

Trade-off of using Nominal Anchors

A nation loses the ability to control its own unique monetary policy to respond to domestic shocks.

Real Interest Parity

A condition where real interest rates are equal across nations with different currencies.

The Paris Accord (2015)

A global resolution designed to limit the increase in global temperature to no more than 2^{\circ} C.

The Kyoto Protocol

An international treaty (based on a 1992 UN agreement) that set specific air pollution reduction targets for participating nations.

Tragedy of the Commons

A phenomenon where resources are depleted due to a lack of ownership and management, as individuals act in their own self-interest.

Trade and Greenhouse Gas Emissions: US Case

Because the US is a net importer of manufactured goods, consumption-based measures of emissions are higher than production-based measures.

Tuna-Dolphin Dispute Ruling

The WTO ruled that nations could not bar imports based on the production process (e.g., net size), only on the product itself.

WTO vs. Regional Trade Agreements

The WTO is a multilateral agreement, whereas NAFTA and the EU are regional trade agreements.

Most Favored Nation (MFN) Principle

A rule stating that every member of the WTO must grant the same rights and treatment to all other members as it grants to its most favored partner.

Customs Union vs. Free-Trade Area (FTA)

Member countries of a customs union use identical external tariffs, while member countries of an FTA maintain different individual tariff structures.

Effective Exchange Rate Calculation Example

If 80\% of trade is with the UK and 20\% with Japan, and the USD appreciates 10\% vs. the Pound and 20\% vs. the Yen, the effective exchange rate changes by -12\%.

Intra-industry Trade

Situations in which countries specialize in and trade different varieties of the same type of product (e.g., cars for cars).

The Gravity Equation of Trade

Predicts bilateral trade based directly on the size of countries' GDP and inversely on the geographic distance between them.

What is the main challenge facing the Eurozone today?\n\n

Many countries violated the rules by running large budget deficits and accumulating too much debt after adopting the Euro.\n\n

Convergence Criteria: Government Debt\n\n

To join the Euro, total government debt must be no more than 60\% of GDP.\n\n

What does the European Central Bank (ECB) NOT do?\n\n

It does not finance the deficits of member countries.\n\n

Why did Britain leave the ERM in 1992?\n\n

The cost of keeping high interest rates (to match Germany) was causing a recession, which became too expensive to maintain.\n\n

Effect of leaving ERM on Britain's economy\n\n

The economy expanded because they could lower interest rates and their currency depreciated, making exports cheaper.\n\n

What is ERM II?\n\n

A system where countries must keep their currency within \pm 15\% of the Euro's value before fully joining the Eurozone.\n\n

What is the primary argument AGAINST a fixed exchange rate?\n\n

A country loses the ability to control its own money supply and interest rates (loss of monetary autonomy).\n\n

When is a fixed exchange rate considered a good idea?

When two countries are highly integrated (trade extensively) and experience similar economic shocks.\n\n

What is Seigniorage?\n\n

An \"inflation tax\" where a government prints money to pay for expenditures instead of taxing citizens directly.\n\n

Why do developing countries borrow in Dollars or Euros?\n\n

International lenders often lack trust in the history of the developing country's domestic money management.\n\n

What is a \"Currency Mismatch\"?\n\n

When a country owes debt in a foreign currency (e.g., USD) but earns income in its own currency (e.g., Pesos). If the home currency crashes, the debt becomes unpayable.\n\n

What was the Gold Standard?\n\n

A system where a currency's value was tied directly to a specific amount of gold; it dominated from 1870 to 1913.\n\n

What is a \"Beggar-thy-neighbor\" policy?\n\n

When a country devalues its currency to make exports cheaper, aiding itself at the expense of trading partners.\n\n

What is an \"Indirect Peg\"?\n\n

If two countries (e.g., Mexico and Canada) both peg to the same third currency (e.g., USD), they are indirectly pegged to each other.\n\n

China's Wealth Calculation: 10\% Depreciation\n\n

If China has more foreign assets than foreign liabilities, a depreciation in the exchange rate will cause their overall wealth to rise.\n\n

Argentina's External Wealth Calculation\n\n

Assets (\$10B) - Liabilities (\$100B) = External wealth of -90 billion (Net Debtor).\n\n

Canada: Farmer buys Japanese tractor with cash\n\n

This counts as a Current Account debit (import) and a Financial Account credit (asset trade).\n\n

Current Account Surplus vs. Deficit Status\n\n

A nation with a surplus is a net lender, while a nation with a deficit is a net borrower.\n\n

What is the Capital Account primarily used for today?\n\n

Debt forgiveness, confiscation of assets, and nonfinancial assets like copyrights.\n\n

Relationship: GNDI vs. GNE in a CA Deficit\n\n

Whenever there is a deficit in the current account, GNDI < GNE.\n\n