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Midterm

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

7 Pages
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Department
Economics
Course Code
ECN 220
Professor
Michael Jolly

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ECN 220 - Evolution of the Global Economy Mid-term
Short Answer Questions
1. Briefly describe three reasons why many primary producing countries during the 1920s
experienced low and unstable export prices.
x International trade during WWI disrupted trade patterns, which had the effect on food
importing countries to increase reliance on their domestic agricultural industries. This
caused these industries to increase food production to offset the loss of imported food
goods. There was also a shift from cereal goods to more income-elastic goods such as
dairy products, which when combined with a domestic dependence on home-grown
foodstuffs made for a very turbulent international agricultural market once the war was
finished for these three reasons:
i. With the war finished, world trade had the potential to resume again at its
previous levels, but since countries that had once imported the majority of their
food were now producing their own, production did not slow down and
continued at the high levels seen during the war. This was because governments
could not suddenly tell their farmers that they were no longer needed.
ii. So instead of slowing down their domestic agricultural industries, governments
took to protectionist measures that restricted trade by use of tariffs in order to
protect their over-produced industries at home.
iii. This led to falling prices around the world for agricultural products and caused
o}ÁÁooµvoÆ}]Z}µPZ}µZíõîì[X
2. Several countries which depended on exporting manufactures experienced slow and unstable
growth during the 1920s. Indicate (with brief explanations) two of the reasons for this.
x Much like the agricultural industries of industrialized countries during the war, primary
producing countries built up manufacturing industries during WWI that, because of the
lack of international trade, overproduced in certain industries such as textiles, iron, and
steel. Adoption of new technologies also contributed to slow and unstable growth to
these industries, because it brought new problems and difficulties that they were not
prepared to deal with. Again once the war was over, these countries with their over-
producing manufacturers did not want to slow down development and thus used it as
another reason to impose tariffs on trade. This protectionism was the biggest cause for
o}ÁvµvoP}ÁZ}(uvµ(µµ]vPZíõîì[X
3. Briefly describe two effects of protectionism on the international trading and financial system
of the 1920s.
x The protectionist policies enacted during the 1õîì[µ}ou(}ZÁ}o
economy because they reduced world income as a result of the very nature of
protectionist measures which ignore the principle of comparative advantage that says
countries are capable of producing certain goods at a lower opportunity cost than
others, and so should be left to do so, with each country specializing in what it is best at
producing and trading with one another, creating a beneficial scenario for all parties
www.notesolution.com
involved. One of the other drastic effects of protect]}v]uµ]vPZíõîì[ÁZ
with so many of the nations that partook in the war now in debt to an increasingly
protectionist United States, countries such as France and Britain could not obtain U.S.
dollars from selling their products to service their debts.
4. Briefly describe how the German hyperinflation of 1922/23 was brought to an end.
x The German hyperinflation was brought to an end with the appointment of Hjalmar
Schacht as currency commissioner who did two things to end inflation. First he replaced
the German Deutschmark with the Rentenmark, where one Rentenmark equalled a
trillion Deutschmarks. This new currency was backed by real estate as opposed to gold
since Germany had none to provide, and this effectively reduced the inflation in
Germany. This together with new restrictions on the Reichsbank concerning its money
creating policies, as well as the Dawes Plan that rescheduled the timeline that Germany
could pay off its war reparations, hyperinflation in Germany was ended.
5. How did German nationalists justify their claim that the hyperinflation of the 1920s was a
result of reparations payments? Is their argument plausible?
x German nationalists (E.g. Nazis) claimed that it was strictly reparations that caused
hyperinflation, but this is easily disregarded because very few payments were made
before the hyperinflation was over, as well as the fact that inflation started before the
fall of the external value of the mark.
6. Explain why German reparation payments were essential to the survival of the international
financial system in the 1920s.
x The dollars that Germany paid to France and Britain in name of reparations originated
from U.S. investors, and France and Britain relied on these reparations to service their
debts to the U.S. So the entire system relied heavily on U.S. investors continuing to lend
to Germany, so once U.S. credit dried up the system was bound to collapse.
7. dZP}ov}(Zíõîì}µo]^P}o-(}]PvÆZvPÇu_XtZ
does this mean and how did it give rise to instability in the international financial system?
x The gold-(}]PvÆZvPÇuZ}µ]vZíõîì[Áµo}(uvÇ
countries simply not having any gold reserves to back up their currency, so knowing that
the U.S. had almost half the worlds reserves at the end of the war as a result of joining
the fight late, as well as the fact that London was still a financial power, dollars and
pounds began to be accepted as substitutes for gold since they could be converted by
their home countries on request. Many countries also obtained dollars and pounds
through short-term borrowings. The United Kingdom actually only had a small reserve of
gold and the scenario of reserves running out was a real danger, this along with the fact
that having your currency spread throughout the world scared the U.S. and the U.K.
because it meant they had much less control over their money supply and made them
vulnerable to capital flight. All of this gave rise to the instability of the international
financial system.
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Description
ECN 220 - Evolution of the Global Economy Mid-term Short Answer Questions 1. Briefly describe three reasons why many primary producing countries during the 1920s experienced low and unstable export prices. N International trade during WWI disrupted trade patterns, which had the effect on food importing countries to increase reliance on their domestic agricultural industries. This caused these industries to increase food production to offset the loss of imported food goods. There was also a shift from cereal goods to more income-elastic goods such as dairy products, which when combined with a domestic dependence on home-grown foodstuffs made for a very turbulent international agricultural market once the war was finished for these three reasons: i. With the war finished, world trade had the potential to resume again at its previous levels, but since countries that had once imported the majority of their food were now producing their own, production did not slow down and continued at the high levels seen during the war. This was because governments could not suddenly tell their farmers that they were no longer needed. ii. So instead of slowing down their domestic agricultural industries, governments took to protectionist measures that restricted trade by use of tariffs in order to protect their over-produced industries at home. iii. This led to falling prices around the world for agricultural products and caused o}ZooZLZo}] ZZ}2Z}Z[Z: 2. Several countries which depended on exporting manufactures experienced slow and unstable growth during the 1920s. Indicate (with brief explanations) two of the reasons for this. N Much like the agricultural industries of industrialized countries during the war, primary producing countries built up manufacturing industries during WWI that, because of the lack of international trade, overproduced in certain industries such as textiles, iron, and steel. Adoption of new technologies also contributed to slow and unstable growth to these industries, because it brought new problems and difficulties that they were not prepared to deal with. Again once the war was over, these countries with their over- producing manufacturers did not want to slow down development and thus used it as another reason to impose tariffs on trade. This protectionism was the biggest cause for Zo}LLZo2}Z}KL Z]L2Z[Z: 3. Briefly describe two effects of protectionism on the international trading and financial system of the 1920s. N The protectionist policies enacted during the 1[Z Z}oKZ}Z}o economy because they reduced world income as a result of the very nature of protectionist measures which ignore the principle of comparative advantage that says countries are capable of producing certain goods at a lower opportunity cost than others, and so should be left to do so, with each country specializing in what it is best at producing and trading with one another, creating a beneficial scenario for all parties www.notesolution.cominvolved. One of the other drastic effects of protect]}L]ZK]L2Z[ZZZ with so many of the nations that partook in the war now in debt to an increasingly protectionist United States, countries such as France and Britain could not obtain U.S. dollars from selling their products to service their debts. 4. Briefly describe how the German hyperinflation of 1922/23 was brought to an end. N The German hyperinflation was brought to an end with the appointment of Hjalmar Schacht as currency commissioner who did two things to end inflation. First he replaced the German Deutschmark with the Rentenmark, where one Rentenmark equalled a trillion Deutschmarks. This new currency was backed by real estate as opposed to gold since Germany had none to provide, and this effectively reduced the inflation in Germany. This together with new restrictions on the Reichsbank concerning its money creating policies, as well as the Dawes Plan that rescheduled the timeline that Germany could pay off its war reparations, hyperinflation in Germany was ended. 5. How did German nationalists justify their claim that the hyperinflation of the 1920s was a result of reparations payments? Is their argument plausible? N German nationalists (E.g. Nazis) claimed that it was strictly reparations that caused hyperinflation, but this is easily disregarded because very few payments were made before the hyperinflation was over, as well as the fact that inflation started before the fall of the external value of the mark. 6. Explain why German reparation payments were essential to the survival of the international
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