FINAL study guide - real


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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 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 CA surplus (too much gold/CA compared to financial account) domestic prices rise and foreign prices lower Monitoring flow of gold lead to external balance for all countries o The “ Rule of the Game ” was another gold adjustment process that was carried out by central banks To reverse or reduce gold outflows
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When not enough gold, sell domestic assets money supply down and interest rates up more people give you financial inflows, which will soon match your CA Banks w/ decreasing gold used this a lot b/c could not redeem currency w/o sufficient amount of gold To reverse or reduce gold inflows When gold enters country, buy domestic assets money supply up and interest rates down reduce financial inflows to match CA Banks w/ too much gold rarely used this because they wanted more financial assets (which earn interest) instead of gold International monetary system during 1918-1939 o Gold standard stopped in 1914 due to war, but attempted after 1918 again o 1930s: countries that had gold standard for long time w/o devaluing currency, suffered Y down and U up Bretton Woods system: 1944-1973 o 1944, 44 countries met to design BW: fixed exchange rate against $, which was fixed against price of gold Also est.: IMF, World Bank, General Agreement on Trade and Tariffs (predecessor to World Trade Organization) o International Monetary Fund Constructed to lend to countries with persistent balance of payment
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