International Financial Relations
What is the IMF? What is the World Bank? What is the focus of the IMF vs what is the focus of the World Bank?
IMF: A major international economic institution established in 1944 to manage international monetary relations. It has gradually reoriented itself to focus on the international financial system, especially debt and currency crises.
WB: An important international institution that provides loans at below-market interest rates to developing countries, typically to enable them to carry out development projects.
What is monetary policy? Provide an example
An important tool of national governments to influence broad macroeconomic conditions such as unemployment, inflation, and economic growth.
EX: The Federal Reserve changing interest rates to fight inflation or unemployment. In economies with fixed exchange rates, like the Eastern Caribbean Dollar, they can change their exchange rate.
What is one difference between civil war and terrorism?
1) CW: Armed rebel group vs the state; TER: individuals or nonstate groups using or threatening violence against noncombatants
2) CW: within the state; TER: can be transnational
What is protectionism? Provide one type and an example
The imposition of barriers to restrict imports.
Ex: tariffs (e.g., Trump's current imposition of tariffs on many trading partners for being treated "unfairly"); nontariff barriers (e.g., EU barriers to import GM products; dumping)
What is the difference between portfolio, FDI, and sovereign lending?
FDI: Invesment in a foreign country via the acquisition of a local facility or the estbalishment of a new facility. Direct investors maintain managerial control of the foreign operation.
Sovereign lending: loans from private financial institutions in one country to sovereign govts of other countries
Portfolio investment: Investment in a foreign country via the purchase of stocks (equities), bonds, or other financial instruments. Do not exercise managerial control.
What is the Bretton Woods monetary system?
The monetary order negotiated among the WWII allies in 1944, which lasted until the 1970s and which was based on a US dollar tied to gold. Other currencies were fixed to the dollar, but were permitted to adjust their exchange rates.
What is insurgency?
A military strategy where small, lightly armed units engage in hit-and-run attacks against the military, government, and civilian targets
What is the difference between comparative advantage and absolute advantage? And what does comparative advantage say about free trade?
AA: country/firm's ability to produce more of a particular good or service than other country/firm's can with same amount of efforts/resources.
CA: country/firm's ability to produce a particular good or service MORE EFFICIENTLY than it can produce other goods/services, s.t. its resources are more efficiently employed in this activity.
CA: Specialization and free trade --> Increased welfare overall
Provide one way in which the IMF can be useful, and one way in which it has been criticized
Useful: (1) Supports cooperation and serves as an intermediary between debtor governments and private financial institutions (attenuates information and coordination problems)
Criticized: (1) it imposes strict austerity in countries under financial stress (e.g., Greece during the Eurozone Crisis of 2011-2012)
What is the difference between a floating exchange rate, a fixed exchange rate, and an adjustable peg? Provide an example of each.
Floating: An exchange-rate policy under which a government permits its currency to be traded on the open market without direct government control or intervention (e.g., value of USD can change without government intervention relative to other currencies)
Fixed: an exchange-rate policy under which a government commits itself to keeping its currency at or around a specific value relative to another currency or a commodity (e.g., during the BW system, USD was fixed to gold; 1 ounce of gold = $35)
Adjustable peg: A monetary system of fixed but adjustable rates. Governments are expected to keep their currencies fixed for extended periods but are permitted to adjust their exchange rates from time to time as economic conditions change. (E.g., during the BW system, other economies had an adjustable peg with the US dollar; Spanish Peseta 39 units to 1 USD from 1950 to 1956; then 60 pesetas from 1960 to 1966)
What are three problems why civil wars and terrorism are hard to deal with? Hint: Bargaining failures
1) Information problems
2) Commitment problems
3) Indivisibility
What is one reason why leaders impose protectionism or trade barriers?
1) domestic/electoral
2) interest groups/lobby
Why can’t countries have fixed-exchange rates, free capital flows, and an independent monetary policy? (i.e., the Mundell-Fleming Trilemma)
Basically, if you have two, you need to give up the third one.
Ex: If you have free capital flows (i.e., investors can move money in and out of the country) and a fixed currency (i.e., 5 pesos to 1 USD), then you cannot have independent monetary policy -- i.e., cannot set your own interest rates; your interest rates have to equal that of the anchor currency's economy, in this example, interest rates of the US, which means you can't set them at what you want.
Imagine MX and US have both 3% interest rates, and Mexico wants to control their own interest rates and sets them at 1%. What would happen to the exchange rate (5 pesos to 1USD)?
Hint: remember that the fixed regime of 5 pesos to 1USD is based on having interest rates at 3%, and that is stable. What happens if one of those interest rates change, and Mexico wants to maintain the fixed exchange rate?
What are some of the benefits and some limitations of a floating exchange rate relative to a pegged exchange rate?
Benefits:
1) Allows market forces to determine price of currency (e.g., disincentivizes "artificial" setting of prices)
2) More freedom for the government to pursue independent monetary policy (e.g., does not need to "defend" or "commit" to any rate; trilemma)
Limitations:
1) Can be very volatile (e.g., less stability that can hurt sectors engaged in international trade and investment)
Why is insurgency a preferred strategy by rebels in civil war?
1) avoid direct confrontation in asymmetrical warfare
2) undermine confidence in the gov't and encourage people to join them for protection
3) hope that govt attacks civilians and radicalize them into joining them
4) modern military machinery more limited
What is the HO trade theory? And what does the RV and the SS theorems say about trade preferences?
HO: Countries will export goods that make intensive use of the FACTORS OF PRODUCTION in which it is well endowed.
SS: Trade protection benefits the scarce FACTOR OF PRODUCTION. In a labor-scarce country, labor benefits from [___] and loses from [____] (see p. 323)
RV: Emphasizes the SECTOR in which FACTORS OF PRODUCTION are employed rather than the nature of the factor itself.