final study guide - intl eocn

final study guide - intl eocn - INTERNATIONAL ECON FINAL...

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INTERNATIONAL ECON FINAL STUDY GUIDE Chapter 18: The International Monetary System, 1870-1973 Goals of macroeconomic policies o Internal balance = Potential output (producing at full employment) + price stability (low inflation) Over-employment inflation Volatile AD and Y volatile prices uncertainty o External balance = CA that is not “too” negative or “too” positive, OR balance of payments equilibrium (CA = financial account) Large deficit foreigners think you can’t repay your debt, so stop lending to you financial crisis Large surplus protectionist or other political pressure from foreign gov’ts o To keep internal balance, countries can revalue (fall in E) or devalue (increase in E) Under BW, de/revaluations were supposed to be infrequent, and fiscal policy was supposed to be used, which can’t achieve both internal and external balance at the same time, like devaluations can Most countries use fiscal for political reasons, but that leads to external imbalances o Gold standard o Had mechanisms that prevented flows of gold (balance of payments) from not getting too positive or negative Prices adjust according to amount of gold circulating in economy, which has effects on the CA Central banks influenced financial asset flows, so that financial account = CA, to reduce gold leaving or entering country (keep prices stable) o Price specie flow mechanism : adjustment of prices as gold flows into or out of a country Inflow of gold inflation
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