115_midterm_solutions_sp07 - Department of Economics...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Department of Economics Economics 115 University of California The 20th Century World Economy Berkeley CA 94720 Spring 2007 First Midterm Guide Prepared by Andrew Jalil and David Agrawal Part I. 1. Bondholders Committee Bondholders committees were formed to resolve problems associated with debt defaults. These committees were formed with the approval of the governments of creditor nations. They were effective in two key respects: (1) They worked to negotiate repayment (2) They blocked borrowers until satisfactory restructuring agreements were formulated. Bondholders committees were vitally important in the pre-1914 period&they facilitated the creation of insurance networks to protect agents from defaults. 2. Gold-Exchange Standard In a gold-exchange standard, ±central banks hold foreign securities convertible into gold at foreign central banks as well as gold bullion² (lecture feb 1 slide 7) The gold standard eventually evolved into a gold-exchange standard due to worries of a worldwide gold shortage. Foreign securities were used to supplement the reserves of central banks because countries feared that global gold supplies were inadequate to meet worldwide demand ( Globalizing Capital , p. 61). The student can also compare the gold-exchange student with the other two variations of the gold standard mentioned in lecture: the gold coin standard and the gold bullion standard. (lecture feb 1 slide 7) 3. Liquidity Trap In the classic story of a liquidity trap, monetary policy is ineffective because the nominal interest rate has fallen close to its zero lower bound. Hence, bonds and money become perfect substitutes for one another and the ability of monetary authorities to stimulate the economy through expansionary open market operations is constrained. An example of a country in a liquidity trap is Japan in the 1990s Some economists argue that the United States was in a liquidity trap near the end of the depression and hence, that monetary policy could not have been effective. Deflationary
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
expectations were of such a large magnitude that they brought the nominal interest rate close to zero. Since the nominal interest rate was so close to its lower bound, monetary policy was rendered ineffective. This is known as the &liquidity trap critique± of the relative merits of monetary policy during this period. However, the leading empirical evidence on the nature of the U.S. recovery from the Great Depression indicates that devaluation and large gold inflows in the post 1933 period engineered high inflationary expectations. In turn, these high inflationary expectations caused ex ante real interest rates to drop, rendering monetary policy very powerful. 4. Unemployment Insurance:
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/15/2008 for the course ECON 115 taught by Professor Sadoulet during the Spring '08 term at University of California, Berkeley.

Page1 / 8

115_midterm_solutions_sp07 - Department of Economics...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online