Exchange Rates
What is a floating exchange rate?
A currency value determined by market forces without direct government control.
What is the Harris-Todaro model?
A model where migration is based on expected income differences between rural and urban areas.
What triggered the 1997 Asian Financial Crisis?
Speculative attacks on overvalued currencies and short-term foreign debt.
What are inclusive institutions?
Systems that distribute power and opportunity broadly across society.
What is development economics?
The study of how economies grow, especially in low- and middle-income countries.
What is a real exchange rate?
The nominal exchange rate adjusted for price level differences between two countries.
Why does labor not move as freely as capital?
Due to legal, political, and social restrictions on migration.
What is a balance of payments crisis?
A situation where a country can't finance its external obligations due to reserve depletion.
What are extractive institutions?
Systems designed to concentrate power and wealth in the hands of elites.
What was key to South Korea’s rapid development?
Export-led growth with investment in education and institutions.
How do capital inflows affect currency value under a floating system?
They cause appreciation of the domestic currency.
What are remittances?
Money sent back home by migrants working abroad.
What role does the IMF play in a currency crisis?
It provides emergency financing and imposes policy reforms
Why do extractive institutions persist?
Because elites benefit from the status quo and block reforms.
What is economic diversification?
Shifting from reliance on one sector to multiple sectors for growth.
What does purchasing power parity imply?
Exchange rates should equalize the price of identical goods in different countries.
Name one economic benefit of migration for receiving countries.
Migrants fill labor shortages and contribute to tax revenue.
What is a sudden stop?
A rapid reversal of capital inflows leading to financial instability.
What is a critical juncture?
A turning point where small differences lead to long-term institutional divergence.
What are conditional cash transfers?
Welfare programs requiring beneficiaries to meet certain behavior conditions.
How does the central bank respond to appreciation pressure in a fixed regime?
It buys foreign currency to prevent the domestic currency from strengthening.
What is a major social risk of migration for origin countries?
Brain drain or loss of skilled labor.
What is the Krugman first-generation crisis model?
It explains currency collapse due to fiscal deficits and reserve depletion.
Give an example of institutional failure from Why Nations Fail.
Zimbabwe: elite capture, weak rule of law, land seizures, economic collapse.
Why is infrastructure critical to development?
It reduces transaction costs and connects markets and people.