POLI 442 Final Misc.

Question 1

Why gold standard failed

Answer 1

• prioritized stability over flexibility
• could not handle major economic shocks
• currency in circulation was directly tied to how much gold the central banks had

Question 2

Price-specie flow mechanism

Answer 2

• home country runs a trade deficit (imports > exports)
• to finance the excess imports, home country exports gold
• this causes the gold stock to fall, meaning that the home country must reduce the stock of currency in circulation
• with less money in circulation, prices fall
• As domestic prices fall, home goods become cheaper which leads to grater demand for foreign consumers
• This will continue until trade balance is restored, but it can take a really long time

Question 3

Trilemma: Fixed Exchange Rate and Open Capital Mobility

Answer 3

You can have a fixed exchange rate and open capital mobility, but that means you can’t have IMP because of the uncovered interest rate parity. Essentially, if you have open capital mobility and a fixed exchange rate, then interest rates must stay the same between countries to ensure that the exchange rate actually stays fixed. Altering the interest rate (or exercising independent monetary policy) would make the exchange rate fluctuate, meaning all three parts of the triangle wouldn’t be met

Question 4

Trilemma: Open Capital Mobility and Independent Monetary Policy

Answer 4

if you have open capital mobility and independent monetary policy then your government is able to change interest rates based on what is going on in the market, but that means that the exchange rate is going to fluctuate based on these interest rate alterations

Question 5

Trilemma: Fixed Exchange Rate and Independent Monetary Policy

Answer 5

If you have a fixed exchange rate and independent monetary policy, then you are in control of what is going in and out of the country. This means you are restricting the flow of capital at times to ensure fixed exchange rate and independent monetary policy, and thus do not have open capital mobility.

Question 6

Norway Oil Success Story

Answer 6

Political response
- Government said oil belongs to everyone, not just private companies
- Created a plan to save a large share of the money in the “sovereign wealth fund”
- Only extract a little of the money at a time
- pour resources into non-oil industries like farming and technology so they don’t solely rely on oil