Mie Interwar Years 19181939

Governments effectively suspended the gold standard during World War I and financed part of their massive military expenditures by printing money. Further, labor forces and productive capacity had been reduced sharply through war losses. As a result, price levels were higher everywhere at the war's conclusion in 1918. Several countries experienced runaway inflation as their governments attempted to aid the reconstruction process through public expenditures. These governments financed their...

Croeconomic Policy Goals in an Open Economy

In open economies, policymakers are motivated by the goals of internal and external balance, Simply defined, internal balance requires the full employment of a country's resources and domestic price level stability. External balance is attained when a country's current account is neither so deeply in deficit that the country may be unable to repay its foreign debts in the future nor so strongly in surplus that foreigners are put in that position. In practice, neither of these definitions...

The International Gold Standard and the Great Depression

One of the most striking features of the decade-long Great Depression that started in 1929 was its global nature. Rather than being confined to the United States and its main trading partners, the downturn spread rapidly and forcefully to Europe, Latin America, and elsewhere. What explains the Great Depression's nearly universal scope Recent scholarship shows that the international gold standard played a central role in starting, deepening, and spreading the twentieth century's greatest...

Gold Standard

An international gold standard avoids the asymmetry inherent in a reserve currency standard by avoiding the 'Wth currency problem. Under a gold standard, each country fixes the price of its currency in terms of gold by standing ready to trade domestic currency for gold whenever necessary to defend the official price. Because there are N currencies and N prices of gold in terms of those currencies, no single country occupies a privileged position within the system Each is responsible for pegging...

Tale Of Two Dollars

Back in 1976, the United States dollar and the Canadian dollar traded roughly at par, that is, at a one-to-one exchange rate. In the following decades, however, Canada's dollar has steadily depreciated against its American cousin. By early 2002, a Canadian dollar was worth only about 65 United States cents.* The tendency of the Canadian currency to depreciate accelerated in the late 1990s as the world prices of many of Canada's natural resource exports slumped. Canadian manufacturing exporters...

Fixing the Exchange Rate to Escape from a Liquidity Trap

Liquidity Trap

During the lengthy Great Depression of the 1930s, the nominal interest rate hit zero in the United States and the country found itself caught in what economists call a liquidity trap. Recall from Chapter 13 that money is the most liquid of assets, unique in the ease with which it can be exchanged for goods. A liquidity trap is a trap because once an economy's nominal interest rate falls to zero, the central bank cannot reduce it further by increasing the money supply that is, by increasing the...

Effects of a Tariff

From the point of view of someone shipping goods, a tariff is just like a cost of transportation. If Home imposes a tax of 2 on every bushel of wheat imported, shippers will be unwilling to move the wheat unless the price difference between the two markets is at least 2. Figure 8-4 illustrates the effects of a specific tariff of per unit of wheat shown as t in the figure . In the absence of a tariff, the price of wheat would be equalized at Pw, in both Home and Foreign as seen at point 1 in the...

Info

Initially, there are 11 workers employed in Home, but only 3 workers in Foreign. Find the effect of free movement of labor from Home to Foreign on employment, production, real wages, and the income of landowners in each country. 2. Suppose that a labor-abundant country and a land-abundant country both produce labor- and land-intensive goods with the same technology. Drawing on the analysis in Chapter 4, first analyze the conditions under which trade between the two countries eliminates the...

Sssons of Developing Country Crises

The emerging market crisis that started with Thailand's 1997 devaluation produced what might be called an orgy of finger-pointing. Some Westerners blamed the crisis on the policies of the Asians themselves, especially the crony capitalism under which businessmen and politicians had excessively cozy relationships. Some Asian leaders, in turn, blamed the crisis on the machinations of Western financiers even Hong Kong, normally a bastion of freemarket sentiment, began intervening to block what it...

Interest Parity

Economics makes an important distinction between nominal interest rates, which are rates of return measured in monetary terms, and real interest rates, which are rates of return measured in real terms, that is, in terms of a country's output. Because real rates of return often are uncertain, we usually will refer to expected real interest rates. The interest rates we discussed in connection with the interest parity condition and the determinants of money demand were nominal rates, for example,...

Problems

Suppose there is a reduction in aggregate real money demand, that is, a negative shift in the aggregate real money demand function. Trace the short-run and long-run effects on the exchange rate, interest rate, and price level. 2. How would you expect a fall in a country's population to alter its aggregate money demand function Would it matter if the fall in population were due to a fall in the number of households or to a fall in the average size of a household 3. The velocity of money, V,...