Seminar: 8

B416: The Evolution of Global Economies

2

Pre Seminar Preparation

Read the attached case study – Exchange Rate Regimes & International Financial System (B416 The Evolution of Global Economies Seminar 8 Case Study)

QuestionsQuestion 1 Briefly explain how the gold standard operated. What were the key differences between the gold

standard and the Bretton Woods system?

Question 2 Briefly answer each of the following questions about the gold standard:

• Was it a fixed exchange-rate system or a flexible exchange-rate system?

• Were countries able to pursue active monetary policies?

• Did countries that ran trade deficits experience gold inflows or gold outflows?

• How would a gold inflow affect a country's monetary base and its inflation rate?

• During the Great Depression, how did the gold standard hinder economic recovery?

Question 3 Under the Bretton Woods system, what were devaluations and revaluations? What is the difference between a devaluation and a depreciation? Why were countries hesitant to pursue a devaluation? Why were they even more hesitant to pursue a revaluation?

Question 4 What is the euro zone? How do the countries of the euro zone benefit from using a single currency? What are the disadvantages to using a single currency?

Question 5 What is pegging? What are the advantages of pegging? What are the disadvantages? Briefly discuss the controversy over China's pegging the value of the yuan.

QuestionsQuestion 6 Under a gold standard, is inflation possible? Consider both the case for an individual country and the case for the world as a whole. Question 7 In discussing the situation of countries leaving the gold standard, or "unilaterally devaluing" during the 1930s, Barry Eichengreen of the University of California, Berkeley, and Jeffrey Sachs of Columbia University argued: "In all cases of unilateral devaluation, currency depreciation increases output and employment in the devaluing country." Explain how leaving the gold standard in the 1930s would lead to an increase in a country's output and employment.Source: Barry Eichengreen and Jeffrey Sachs, "Exchange Rates and Economic Recovery in the 1930s," Journal of Economic History, Vol. 45, No.4, December 1985, p. 93Question Question 8 Evaluate the following argument: The United States did not really leave the gold standard in 1933. Under the Bretton Woods system, the United States stood ready to redeem U.S. currency for gold at a fixed price, and that is the basic requirement of the gold standard. Question 9 Why has support for a system of fixed exchange rates tended to be higher in Europe than in the United States? Question 10 [Related to the Chapter Opener on page 517] An article in the Economist magazine in late 2012 observed: The euro was meant to buttress the single market, reducing transaction costs and removing the risk of competitive devaluation. Could it now destroy the single market instead?a. How did the euro reduce transactions costs?b. What is a "competitive devaluation"? Is not being able to devalue their currencies always a benefit to euro-zone countries? Briefly explain.c. If countries abandon the euro and return to using their own currencies, how might this action "destroy" the single European market?Source: "Coming Off the Rails," Economist, October 20, 2012.

QuestionsQuestion 11 In 2012, an article in the New York Times observed that: "The financial consequences of a Greek departure from the euro monetary union could be severe."a. What does the article mean by "a Greek departure from the euro monetary union"?b. Why might a Greek departure lead to severe financial consequences? c. Would only people in Greece feel the financial consequences? Briefly explain.Source: Mark Scott, "For Europe's Banks, Pinch of Debt Crisis Intensifies," New York Times, May 15, 2012. Question 12 In 2010, arguing that the Chinese yuan was overvalued versus the U.S. dollar, President Barack Obama said he wanted "to make sure our goods are not artificially inflated in price and their goods are not artificially deflated in price; that puts us at a huge competitive disadvantage."a. What does the value of the yuan have to do with U.S. goods being "artificially inflated in price" or Chinese goods being "artificially deflated in price"?b. Why would this "inflation" and "deflation" in prices put U.S. goods at a competitive disadvantage?Source: Edward Wong and Mark Landler, "China Rejects U.S. Complaints on Its Currency," New York Times, February 4,2010. Question 13 In late 2012, an article in the Wall Street Journal, observed that: "The once-predictable Chinese yuan has become increasingly volatile, a development that ... poses greater foreign-exchange risks for businesses and investors."a. Why was the yuan "once predictable"? Why had the yuan become more volatile?b. Why would the volatility of the yuan pose exchange-rate risks for businesses and investors?Source: Lingling Wei, "Staid Yuan Roams as China Lets Out Slack," Wall Street Journal, October 25, 2012.

End of Seminar

© Pearson College 2015