Week 7-8 MT Review

Week 7-8 MT Review - Week 7 The Dollar in a Global Capital...

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Unformatted text preview: Week 7: The Dollar in a Global Capital Market Keep in mind that the terms open market operations / system open market transactions are the mechanisms through which the Federal Reserve conducts monetary policy by purchasing or selling Treasury securities, as Henning describes (and most likely we will review this in class). The Dollar in a Global Capital Market Historical Timeline, 1978-2001 1978-79 A second round of price increases after the fall of the Shah of Iran pushes oil prices to $35 per barrel. 1979-80 With inflation at 15%, President Carter appoints Paul Volcker as Federal Reserve chairman. Interest rates rise as Volcker tightens monetary policy. 1981 President Reagan secures increases in military spending and tax cuts from the Congress. With inflation still out of control, the prime rate reaches 20.5% and the economy falls into its deepest recession since the 1930s. 1981-84 Inflation drops to less than 5%, but the U.S. budget deficit skyrockets from $71 billion to $208 billion, and the trade deficit jumps from $13 billion to $138 billion. 1985 The dollar hits ¥264 and DM3.5, fuelling protectionist pressures in Congress. Treasury Secretary James Baker negotiates the Plaza Accord to push the dollar’s value down through foreign exchange intervention. 1986 Reagan appointees vote for interest rate cuts over Volcker’s objections, but reverse their position after Volcker threatens to resign. 1986-87 After the dollar drops to ¥154 and DM1.8, the G-7 agrees in the Louvre Accord to push the dollar back up. Treasury officials allow the dollar’s slide to continue, however. 1987 Volcker retires and President Reagan appoints Alan Greenspan as his replacement. Two months later, the Dow loses 508 points (22.6%) on “Black Monday,” October 19, the largest stock market collapse in U.S. history. 1988-89 As inflation rises, Greenspan pushes U.S. interest rates upward on the belief that only a sharp contraction can slow the rapid increase in prices. 1990 The U.S. economy slips into recession, but the Fed refuses to cut interest rates out of concern for rising budget deficits, the dollar’s weakness, and the threat of higher oil prices after Iraq’s invasion of Kuwait. 1990-91 As the budget deficit explodes to $220 billion, President Bush breaks his “no new taxes” pledge in a budget accord with House Democrats. The Fed reduces interest rates the very next day. The recession ends in March 1991, but growth remains sluggish and unemployment high. 1993 President Clinton’s first budget raises taxes and cuts spending, but passes only after Vice President Gore’s vote breaks a 50-50 tie in the Senate. 1995-97 The dollar hits an all-time low of ¥80 in April 1995. After the Treasury Department intervenes in foreign exchange markets, the dollar begins to rise in value to ¥140 by spring 1997 on the strength of the U.S. economy....
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Week 7-8 MT Review - Week 7 The Dollar in a Global Capital...

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