ECO342H1 Study Guide - Winter 2018, Comprehensive Midterm Notes - Full Employment, United States Dollar, International Law
ECO342H1
MIDTERM EXAM
STUDY GUIDE
Fall 2018
ECO342: Lecture 1
01 Introduction and Overview:
- 2 periods post-WW2: Golden Age up until 1971; post-Golden Age
- Golden Age had remarkable growth as opposed to current age
- US GDP/capita surpasses the UK during WW2
- Bretton Woods held a regime of fixed exchange rates with the USD exchangeable at $35/oz
gold
- Huge inflation spikes in the 1970s, the Fed matches with rate hikes up to 18%
Fisher: Nominal interest rate = Real interest rate + inflation
- Policy change in the 1970s from government interventionism to eliminate unemployment to
“anti-inflationary” tactics to allow the price mechanism to bring about full employment
- Russia bore the brunt of the casualties in WW2; Germany was second worst
Keynes and WW2:
- Treaty of Versailles was not liked by Keynes
- He predicted that the conditions would lead to ultra-nationalism and war (1919)
Post-WW2:
1) Bretton Woods: Fixed exchange rate regime with $35 USD/oz gold
2) Reduced tariffs (GATT) to stimulate international trade
3) US provides aid to Germany (Marshall Plan) and Japan
4) Commitment to full employment through government spending, taxation, interest rates
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ECO342 – Lecture 2
02 Bretton Woods:
- Ratified agreement in 1946; gold-backed USD at $35/oz, IMF to handle the fluctuations in par
values
- link between paper currencies and gold guaranteed price stability for the long-run and
facilitated international trade
- The system started to fall apart in 1968
Gold Standard:
- defines currency value relative to weight of gold
- paper notes act as intermediary; there was a limit to how much one could print
- gold value of currency determined value relative to other currencies
- gold flowed in and out based on the balance of payments, changing the gold:note ratio
- if the demand for notes was larger than the reserve could support, banking crisis could begin
- central banks formed as the lender of last resort
Money:
- Needs to be something widely accepted
- Needs to be easy to divide, easy to carry, maintain value over time
- paper currency acted as an intermediate, exchangeable for gold at any time; made carrying
easier.
- if there was an abundance of notes in circulation, people might prefer gold to notes, draining
reserves
- small deviations from the par values was due to transportation cost of gold
- banking crises often happened in September or October due to harvests causing a large demand
for gold/notes
- If the demand for notes was high and the deficit in balance of payments was high, banks
wouldn’t be able to issue notes to defend the reserve ratio; this happened in 1907 ( liquidity
crisis) and prompted the creation of the Fed in 1913
- Canada suggested not having a reserve ratio; the point of a reserve is to use it in times of crisis
- A clamor for gold in one country could cause a crisis in another country
Balance of Payments
1) International credit/debit happens through trade, interest and dividend receipts and capital
movements
2) Imbalances usually balance themselves out
3) Creditor country: Exports > Imports; Debtor country: Imports > Exports
4) Countries invest in foreign countries when they have a balance of payment surplus
5) Imports are function of domestic growth; exports are a function of foreign growth
6) Debtors eventually have to repay with interest and dividends
7) Capital movement independent of trade doesn’t occur until after WW2
Balance of payments = Current account - Capital Account = 0
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find more resources at oneclass.com
