International Politics (Chapter 9)

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how is a national monetary system a classic public good?
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it benefits everyone, but because people cannot be excluded from its benefits and charged for them, there is little incentive for private firms to provide it.
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the price at which one currency is exchanged for another
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exchange rate
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in terms of a currency, to increase in value in terms of other currencies
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appreciate
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in terms of a currency, to decrease in value in terms of other currencies
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depreciate
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to reduce the value of one currency in terms of other currencies.
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devalue
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how do higher interest rates effect the demand for currency?
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increase
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an important tool of national governments to influence broad macroeconomic conditions such as unemployment, inflation, and economic growth. Typically, governments alter this by changing national interest rates or exchange rates.
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monetary policy
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the institution that regulates monetary conditions in an economy, typically by affecting interest rates and the quantity of money in circulation.
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central bank
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if the central bank wants to stimulate the economy, what does it do?
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lowers interest rates (this move makes it easier for people and companies to borrow, and it allows the economy to expand).
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if the central bank wants to stimulate demand for its country's products in world markets and help local producers, what does it do?
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lower interest rates (the weaker currency makes local goods cheaper to foreigners and spurs exports. It also makes foreign goods more expensive to local residents and reduces imports).
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an exchange rate policy under which a government commits itself to keep its currency at or around a specific value in terms of another currency or a commodity, such as gold.
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fixed exchange rate
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the monetary system that prevailed between around 1870 and 1914, in which countries tied their currencies to gold at a legally fixed price.
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gold standard
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an exchange rate policy under which a government permits its currency to be traded on the open market without direct government control or intervention.
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floating exchange rate
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this is the monetary order negotiated among the World War II allies in 1944, which lasted until the 1970s and which was based on a U.S. dollar tied to gold. Other currencies were fixed to the dollar but were permitted to adjust their exchange rates.
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Bretton Woods monetary system
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a monetary system of fixed but adjustable rates. Governments are expected to keep their currencies fixed for extensive periods but are permitted to adjust the exchange rate from time to time as economic conditions change.
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adjustable peg
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GENERAL NOTE: BRETTON WOODS MONEY SYSTEM the Bretton Woods system meant that the U.S. dollar's value could not change (it was fixed at $35 per ounce of gold). Other governments also fixed their currency against the dollar, but the national government of a country other than the United States could devalue or revalue its currency's value if it felt a change was necessary.
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GENERAL NOTE: BRETTON WOODS MONEY SYSTEM
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GENERAL NOTE: PROS AND CONS OF FIXED EXCHANGE RATE Pros: fixed exchange rates provide currency stability and predictability, which greatly facilitate trade, investment, finance, migration and travel. Cons: a fixed rate reduces or eliminates a government's ability to have its own independent monetary policy, which can be costly (can't alter interest rates to stimulate economy)
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GENERAL NOTE: PROS AND CONS OF FIXED EXCHANGE RATE
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which type of people in a country are more likely to favor a floating exchange rate?
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those whose economic activities are entirely domestic (because they are indifferent to currency fluctuations but want the government to be able to affect the national economy as necessary).
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why type of people in a country are more likely to favor a fixed exchange rate?
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those with international economic concerns (because too much volatility in exchange rates can be harmful to their activities).
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which type of people in a country are more likely to favor a strong exchange rate in comparison to other currencies?
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consumers (a strong exchange rate allows consumers and others to buy more of the world's products, thereby increasing national purchasing power).
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which type of people in a country are more likely to favor a weak exchange rate in comparison to other currencies?
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producers (manufacturers and farmers) (a strong exchange rate makes domestic goods more expensive to foreigners, which harms national producers who compete with foreigners on local or world markets).
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this is one of the core functions of the institutions of national government. It provides predictability in the value of money and thus in the prices of goods.
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national monetary order
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this has to provide predictability in currency values across borders. If traders, investors, tourists, and others had no idea what exchange rates would be tomorrow or next week, they would be very reluctant to engage in exchange across borders. For the international economy to work well, there must be some predictability.
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international monetary order
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in the absence of world government and a world money, what are the two things that were used in history as common denominators for international relations? (2)
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dollar, gold
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a formal or informal arrangement among governments to govern relations among their currencies; the agreement is shared by most countries in the world economy.
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international monetary regime
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what are the two principal features of international monetary regimes?
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whether currency values are expected to be fixed or floating or a mix, whether there will be a common base or standard to which currencies can be compared.
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what are the three standards that have been used over time to compare currencies?
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a commodity standard, a commodity-backed paper standard, a national paper currency standard
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this uses a good with value of its own as the basic monetary unit. Typically, this involves a precious metal such as gold or silver. For example, all major national currencies had a fixed value in terms of gold from 1870 to 1914.
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commodity standard
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this is similar to the Bretton Woods monetary susyem that prevailed from 1945 to 1973. Under this, national governments issue paper currency with a fixed value in terms of gold (or some other commodity). This is one step removed from a pure gold standard, as it requires that governments be able to commit credibly to stand ready to redeem the currency for gold. Under this, national currency values are comparable because they are all expressed in terms of a common commodity.
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commodity-backed paper standard
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under this system, national currencies are only backed by the commitments of their issuing governments to support them. In this context, people want to know that the government will act to ensure that the national currency continues to be valuable. This may not mean committing to a fixed rate; it does mean committing to the currency not losing so much value as to become undesirable.
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national paper currency standard
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during the 1896 United States presidential election, the populist's campaign was largely focused on switching from the gold to silver standard, what two things would this have done? Many farmers wanted this.
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devalued the dollar (making American exports more competitive) and raised American prices.
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why did Germany agree to the currency union in Europe when everyone's currency was pegged to Germany's already? (3)
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the ECB (European Central Bank) would be based in Germany (they guaranteed that its constitution would be similar to Germany's current one), Germany also wanted a reduction in currency volatility in Europe (and no one else would continue using the current one), the creation of the Europe and ECB was connected to a broad range of nations on many issues.
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when do currency crises' usually occur?
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when government exchange rate commitments are not fully credible.
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GENERAL NOTE: HOW DOES A CURRENCY CRISIS OCCUR? the government commits itself to a particular exchange rate, over time, for some reasons, the government faces economic and political difficulties in maintaining a fixed rate. as the government faces increasing pressures to devalue the currency, people begin to doubt the credibility of the government's commitment to keep the exchange rate stable. This unease gives investors strong reasons to sell the nation's currency. eventually, the gov runs out of time and the currency is devalued. Anyone in the nation with debt problems is immediately screwed, and recessions is almost always inevitable. Uncertainties in one country can also lead to uncertainties in others as well.
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GENERAL NOTE: HOW DOES A CURRENCY CRISIS OCCUR?
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