ECON303 Topic 5 - TOPIC 5 The International Monetary System...

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TOPIC 5 The International Monetary stem before 1973 System before 1973 1
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acroeconomic Goals Macroeconomic Goals “Internal balance” are goals of full employment (or normal production) and price stability (or low inflation). Over employment tends to lead to increased prices and under employment tends to lead to decreased prices. olatile aggregate demand and output tend to create volatile prices Volatile aggregate demand and output tend to create volatile prices. Unexpected inflation redistributes income from creditors to debtors nd makes planning for the future more difficult. and makes planning for the future more difficult. 2
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acroeconomic Goals (cont ) Macroeconomic Goals (cont.) “External balance” describes the current account that is not “too” negative or “too” positive – an optimal CA A large current account deficit creates fear that an economy cannot repay its accumulating foreign debts, leading to a stop on lending a financial crisis. A large current account surplus can cause protectionist or other political pressure by foreign governments (e.g., ressure on Japan in the 1980s and China in the 2000s) pressure on Japan in the 1980s and China in the 2000s). Can also be where CA+KA=0 so that official reserves are constant 3
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old Standard Gold Standard Under the gold standard from 1870–1914 and after 1918 for some countries, each central bank fixed the lue of its currency relative to a quantity of gold (in value of its currency relative to a quantity of gold (in ounces or grams) by trading domestic assets in change for gold exchange for gold. For example, if the price of gold was fixed at $35 per ounce y the Federal Reserve while the price of gold was fixed at by the Federal Reserve while the price of gold was fixed at £14.58 per ounce by the Bank of England, then the $/£ exchange rate must have been fixed at $2.40 per pound. Why? 17-4
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old andard Gold Standard The gold standard from 1870–1914 and after 1918 had mechanisms that prevented flows of gold reserves (the BoP) from becoming too positive or too negative. Prices tended to adjust according the amount of gold circulating in an economy, which had effects on the ows of goods and services: the current account flows of goods and services: the current account. Central banks influenced financial capital flows, so that e non serve part of the financial account partly the non reserve part of the financial account partly matched the current account, thereby reducing gold outflows or inflows. 5
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old andard ( nt ) Gold Standard (cont.) rice specie flow mechanism the adjustment of Price specie flow mechanism is the adjustment of prices as gold (“specie”) flows into or out of a untry causing an adjustment in the flow of country, causing an adjustment in the flow of goods.
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This note was uploaded on 05/26/2010 for the course ECON 1160 taught by Professor Byrke during the Spring '10 term at Macomb Community College.

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ECON303 Topic 5 - TOPIC 5 The International Monetary System...

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