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Final

Exam Test Bank Answers - 2009 (This was given to us by the professor before the test)

12 Pages
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Department
Economics
Course Code
ECN 220
Professor
Michael Jolly

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Evolution of the Global Economy Exam
Short Answer Questions
1. Briefly indicate the two institutions established as a result of the Bretton Woods Agreement
and indicate the major problems with which each of these institutions were originally
intended to deal.
a. The Bretton Woods Agreement was finalized at a conference in Bretton Woods, New
Hampshire in 1944. The two institutions that were created as a result of this agreement
were the International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (IBRD or the World Bank). The General Agreement
on Tariffs and Trade (GATT) is sometimes also included as it embodies the planners of
the Bretton Woods Agreement goal of reducing trade barriers. The two other goals that
hoped to be achieved by these institutions were to help stabilize exchange rates and to
assist nations that are unable to pay their international debts (the IMF), and to provide
relief to war-torn nations and assist with reconstruction (IBRD).
b. dZ/D&[ original goal, which has not changed, was to provide loans to its members
under different programs for short term assistance. The most visible role is that of a
last-resort creditor to countries who experience crises with their international
payments.
2. Describe the original mission of the World Bank and indicate its current major role.
a. dZt}ovl[}]P]voP}oÁ}}À]]v}}µv]]vZ
reconstruction of war-torn areas hence the name IRBD. However today the IRBD makes
up one of the five organizations under the World Bank with its original role slightly
changed to provide funds for specific development projects like bridges and schools.
3. Briefly describe the main differences between the W.T.O. and its predecessor, the G.A.T.T.
a. The General Agreement on Tariffs and Trade (GATT) was originally just an agreement
formed in 1946 that hoped to be implemented into an International Trade Organization
(ITO), but when that failed the agreement remained intact as a stand-alone pact.
Several trade rounds took place after that time and the GATT evolved to include several
other trade rules eventually culminating in the formation of the World Trade
Organization (WTO) in 1995 that became a fully fledged international organization.
b. The main differences between the GATT and the WTO are that while the GATT focused
narrowly on manufactured goods, the WTO is much more comprehensive, looking to
new issues beyond the scope of the GATT in the new round of negotiations called the
Doha Development Agenda.
4. What were the three principal objectives of the IMF when it was first established?
a. The original principal objectives of the IMF were to provide loans of foreign currency to
member countries experiencing crises in its international debt obligations, under the
terms of these loans it applies strict conditions that must be met in order for access to
www.notesolution.com
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the foreign capital and finally it also policed the system of fixed exchange rates until
1971.
5. Briefly describe shallow integration and deep integration and give an example of each.
a. Shallow integration is the elimination of tariffs (taxes on imports) and quotas
(quantitative restrictions on imports) as shallow integration because it occurs at the
}v}v}vZ}µvÇ[}u]}o]ÇX
b. Deep integration is the elimination or reduction of trade barriers caused by non-trade-
related domestic policies. In other words, it is domestic policies enacted that do not
entirely have to do with trade, for example the European Union.
c. Degrees of economic integration can be categorized in six stages:
i. Preferential trading area t reduced tariffs, shallow
ii. Free trade area t no tariffs, shallow
iii. Customs Union t common external tariff, shallow
iv. Common market t free movement of factors of prod., shallow/deep
v. Economic and monetary union t shared market and currency, deep
vi. Complete economic integration t very deep
6. Indicate (with brief explanations) two criticisms directed by the less developed countries
(LDCs) at the industrialized countries when they seek to impose common labour standards
throughout the world.
a. In LDCs, children may be providing the income for the family in many instances so
applying children labour laws can push these families deeper into poverty.
b. It is only until recently that industrialized countries themselves implemented strict
labour laws, so it is unfair to expect LDCs to follow suit so soon.
c. United States labour code exempts agriculture from many of its standards, so even in
the U.S. there are estimates that as low as 300,000 to as high as 800,000 children work
in the agriculture industry.
7. In the context of environmental standards define:
a. Trans-boundary t Low environmental standards in one country can degrade the
environment in another country or countries. Polluted rivers and acid rain clouds are
not limited to national boundaries and travel between countries, impacting them
negatively.
b. Non-trans-boundary t These are environmental impacts that do not cross borders and
such only affect the country in which they are produced. These are impacts like soil
degradation and drinking water contamination in larger countries.
c. Industrialized countries often have much stricter environmental standards then LDCs
and because of this, rich countries are often accused of exporting their pollution by
o}]vPZ]]Ç]vµ]]v>XdZ]o}}v]µ}^}Z}}u_
by countries to become more and more lax with standards in order to attract
investment and jobs and in order to stay competitive.
8. Briefly indicate the immediate causes of the Mexican peso crisis of 1994 and 1995.
a. Revolts in the Mexican state of Chiapas of farmers as well as the leading presidential
candidate being assassinated before an upcoming election caused investors to become
www.notesolution.com
Page | 3
wary about their dealings in Mexico and many, both domestic and foreign, sold their
peso-denominated assets. When the presidential winner, Ernesto Zedillo, took office, he
agreed that the peso was overvalued and thus announced a 15% devaluation of the
peso. This was a step in the right direction but investors and economists had expected
20 to 30 percent devaluation, and instead of inspiring confidence in the new
u]v]]}vU]oo}[]}vu]ZZÇdid not understand the
severity of the crisis. This sent more capital out of the country and culminated in a more
then 78% loss of value for the peso. The causes for this collapse can be attributed to:
i. A policy of relying on large foreign inflows of world savings through a large
financial account surplus (current account deficit) proved to be unstable.
1. Too much of this capital was also short-term portfolio investment as
opposed to long-term direct investment. Not necessarily bad but with
an overvalued peso, investors feared that surprise devaluation could
diminish the value of their assets so they converted their pesos into
dollars and on a large scale resulted in capital flight.
ii. Another lesson learned from this crisis was how difficult it is to devaluate
µvÇ]vÁo]vPPÇuXDÆ]}[µ]}µíñvÀoµ]}v
was in the right step but it undermined credibility in the exchange rate system.
Since then economists have argued in favour of either a completely fixed
exchange rate system with not discretionary monetary policy, or a floating
exchange rate such as what Mexico has followed since the crisis.
9. Define
a. Direct foreign investment t FDI is a measure of foreign ownership of productive assets.
Increasing this can be one measure of growing economic globalization. Generally
thought of as a long-term commitment, and thus much more stable/not capital flight
prone.
b. Portfolio investment t This the purchase of stocks, bonds, and the money market
instruments by foreigners in order to realize a capital gain. This does not result in
foreign ownership or legal control and thus is very volatile and a risk for capital flight
when exchange rates are changing.
10. (]vZ}À]v]P[X,}Á}]((Zµ]o]]µuÆZvPM
a. Covered interest rate arbitrage is what arbitrageurs acquire money where interest rates
are low, and then lend it where they are high, pocketing the difference. This is a
powerful force in the world economy as it puts downward pressure on those with high
interest rates, and upward pressure on those with low interest rates. This is one way in
which economic conditions travel across borders. This affects the exchange rate model
in two ways:
i. Speculation that a currency will appreciate first pushes up forward rates that
govern the futures markets for currencies, and then the spot rate as traders buy
more of the currency to sell in the future.
ii. If interest rates in a country rise relative to another country, the demand for the
}v}µvÇ[µvÇÁ]oov]ÀoµÁ]oo]X
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Description
P a g e 1 Evolution of the Global Economy Exam Short Answer Questions 1. Briefly indicate the two institutions established as a result of the Bretton Woods Agreement and indicate the major problems with which each of these institutions were originally intended to deal. a. The Bretton Woods Agreement was finalized at a conference in Bretton Woods, New Hampshire in 1944. The two institutions that were created as a result of this agreement were the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD or the World Bank). The General Agreement on Tariffs and Trade (GATT) is sometimes also included as it embodies the planners of the Bretton Woods Agreement goal of reducing trade barriers. The two other goals that hoped to be achieved by these institutions were to help stabilize exchange rates and to assist nations that are unable to pay their international debts (the IMF), and to provide relief to war-torn nations and assist with reconstruction (IBRD). b. @Z,[Z original goal, which has not changed, was to provide loans to its members under different programs for short term assistance. The most visible role is that of a last-resort creditor to countries who experience crises with their international payments. 2. Describe the original mission of the World Bank and indicate its current major role. a. @ZJ}o Ll[Z}]2]Lo2}oZ}}]ZZ]ZL } }L]Z]LZ reconstruction of war-torn areas hence the name IRBD. However today the IRBD makes up one of the five organizations under the World Bank with its original role slightly changed to provide funds for specific development projects like bridges and schools. 3. Briefly describe the main differences between the W.T.O. and its predecessor, the G.A.T.T. a. The General Agreement on Tariffs and Trade (GATT) was originally just an agreement formed in 1946 that hoped to be implemented into an International Trade Organization (ITO), but when that failed the agreement remained intact as a stand-alone pact. Several trade rounds took place after that time and the GATT evolved to include several other trade rules eventually culminating in the formation of the World Trade Organization (WTO) in 1995 that became a fully fledged international organization. b. The main differences between the GATT and the WTO are that while the GATT focused narrowly on manufactured goods, the WTO is much more comprehensive, looking to new issues beyond the scope of the GATT in the new round of negotiations called the Doha Development Agenda. 4. What were the three principal objectives of the IMF when it was first established? a. The original principal objectives of the IMF were to provide loans of foreign currency to member countries experiencing crises in its international debt obligations, under the terms of these loans it applies strict conditions that must be met in order for access to www.notesolution.com P a g e 2 the foreign capital and finally it also policed the system of fixed exchange rates until 1971. 5. Briefly describe shallow integration and deep integration and give an example of each. a. Shallow integration is the elimination of tariffs (taxes on imports) and quotas (quantitative restrictions on imports) as shallow integration because it occurs at the }L}ZL}LZ }L[Z}KZ] }o] : b. Deep integration is the elimination or reduction of trade barriers caused by non-trade- related domestic policies. In other words, it is domestic policies enacted that do not entirely have to do with trade, for example the European Union. c. Degrees of economic integration can be categorized in six stages: i. Preferential trading area J reduced tariffs, shallow ii. Free trade area J no tariffs, shallow iii. Customs Union J common external tariff, shallow iv. Common market J free movement of factors of prod., shallowdeep v. Economic and monetary union J shared market and currency, deep vi. Complete economic integration J very deep 6. Indicate (with brief explanations) two criticisms directed by the less developed countries (LDCs) at the industrialized countries when they seek to impose common labour standards throughout the world. a. In LDCs, children may be providing the income for the family in many instances so applying children labour laws can push these families deeper into poverty. b. It is only until recently that industrialized countries themselves implemented strict labour laws, so it is unfair to expect LDCs to follow suit so soon. c. United States labour code exempts agriculture from many of its standards, so even in the U.S. there are estimates that as low as 300,000 to as high as 800,000 children work in the agriculture industry. 7. In the context of environmental standards define: a. Trans-boundary J Low environmental standards in one country can degrade the environment in another country or countries. Polluted rivers and acid rain clouds are not limited to national boundaries and travel between countries, impacting them negatively. b. Non-trans-boundary J These are environmental impacts that do not cross borders and such only affect the country in which they are produced. These are impacts like soil degradation and drinking water contamination in larger countries. c. Industrialized countries often have much stricter environmental standards then LDCs and because of this, rich countries are often accused of exporting their pollution by o} ]L2Z]]]LZ]Z]L> Z:@Z]ZoZ} }L]Z}^ }Z}}K_ by countries to become more and more lax with standards in order to attract investment and jobs and in order to stay competitive. 8. Briefly indicate the immediate causes of the Mexican peso crisis of 1994 and 1995. a. Revolts in the Mexican state of Chiapas of farmers as well as the leading presidential candidate being assassinated before an upcoming election caused investors to become www.notesolution.com
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