Week 9

Question 1

What is the Oxford English Dictionary’s definition of money?

Answer 1

Money is any generally accepted medium of exchange that enables a society to trade goods without barter, and it can be in the form of coins, banknotes, or digital currency.

Question 2

What are commodity money examples?

Answer 2

Gold, silver, shells, and grain are examples of commodity money, which has inherent value or represents agreed-upon value.

Question 3

What is token money?

Answer 3

Token money includes coins or paper that can be exchanged for a certain amount of gold or silver, such as under the gold standard.

Question 4

What is fiat money?

Answer 4

Fiat money is currency issued by a government that is not backed by any physical commodity but is accepted as a medium of exchange by law.

Question 5

How did the influx of silver from Potosi affect global trade?

Answer 5

The silver from Potosi shifted global trade, particularly with China, and contributed to the development of capitalism in Europe by moving away from barter systems.

Question 6

What role did the Bank of England play in the development of central banking?

Answer 6

The Bank of England, founded in 1694, became the model for central banks and began managing public debt and issuing currency for the government.

Question 7

When was the Federal Reserve created, and what was its purpose?

Answer 7

The Federal Reserve was created in 1913 to respond to financial crises, centralize control over the monetary system, and regulate banks.

Question 8

What was the key difference between the U.S. Federal Reserve and the Bank of Canada?

Answer 8

Unlike the U.S. Federal Reserve, Canada did not establish its own central bank until 1935, and its currency control was transferred from private interests to the federal government in 1938.

Question 9

What was the impact of the Home Bank failure in 1923 on Canadian banking?

Answer 9

The Home Bank failure led to stronger regulation of the banking system in Canada and helped prevent further financial crises during the Great Depression.

Question 10

What significant change did the 1967 Bank Act revision bring to Canadian banking?

Answer 10

The revision lifted the interest rate ceiling and allowed Canadian banks to enter the mortgage field, fostering a more competitive and open banking system.

Question 11

What is the primary motivation behind the introduction of the euro?

Answer 11

The euro was introduced to rival the U.S. dollar and create a more unified currency for Europe, fostering greater financial stability.

Question 12

What challenges has the euro faced since its introduction?

Answer 12

The euro faced setbacks during the 2008 financial crisis and the eurozone debt crisis, limiting its initial success as a global reserve currency.

Question 13

Why did Europe seek “strategic autonomy” from the U.S. dollar?

Answer 13

Europe wanted to reduce its reliance on the U.S. dollar due to vulnerabilities created by U.S. sanctions and protectionist policies, particularly during the Trump administration.

Question 14

What is the purpose of the Next Generation EU (NGEU) bonds?

Answer 14

The NGEU bonds, backed by all EU member states, aim to create a “safe asset” similar to U.S. Treasury bonds, boosting confidence in the euro.

Question 15

What is the limitation of the NGEU bonds in supporting the euro’s global role?

Answer 15

The NGEU bonds are temporary, set to end by 2026, and their scale is small compared to the U.S. debt market, limiting their long-term impact.

Question 16

What are the structural weaknesses that hinder greater euro adoption?

Answer 16

The eurozone lacks a financial union, fiscal redistribution, and has fragmented capital markets, which weakens the euro’s global appeal.

Question 17

What is the potential role of digital currencies in global finance?

Answer 17

Digital currencies issued by central banks, including a potential digital euro, could help balance the global monetary system and challenge the dominance of the dollar.

Question 18

What is the Big Mac Index used to measure?

Answer 18

The Big Mac Index compares the price of a Big Mac across countries to estimate the “fair value” of currencies and highlights discrepancies in exchange rates.

Question 19

What did the Big Mac Index reveal about the Hong Kong dollar?

Answer 19

The Big Mac Index showed that the Hong Kong dollar was undervalued by about 54% in 2021, suggesting its market value was stronger than implied by the exchange rate.

Question 20

What is the main critique of the Big Mac Index for currency speculation?

Answer 20

The Big Mac Index is not reliable for short-term currency speculation, as it often leads to losses rather than profits.

Question 21

What is the adjusted Big Mac Index?

Answer 21

The adjusted Big Mac Index accounts for factors like wages and productivity, improving its accuracy in predicting currency valuations but still showing limited effectiveness for speculative trading.

Question 22

What does PPP (Purchasing Power Parity) theory assume?

Answer 22

PPP theory assumes that in the absence of transportation costs and tariffs, identical goods should have the same price when expressed in a common currency.

Question 23

What is the primary characteristic of free-floating exchange rates?

Answer 23

Free-floating exchange rates are set purely by market forces, with supply and demand driving the currency’s value without central bank intervention.

Question 24

What is managed-floating exchange rate?

Answer 24

A managed-floating exchange rate allows market forces to set the currency value on a day-to-day basis, but central banks may intervene occasionally to stabilize the currency.

Question 25

What are fixed exchange rates?

Answer 25

Fixed exchange rates are pegged to one or more currencies, and the central bank must maintain the currency peg using foreign exchange reserves.

Question 26

What is a currency board system?

Answer 26

A currency board system involves a country’s currency being fully backed by a foreign reserve currency or asset, maintaining a fixed exchange rate.

Question 27

Which countries use a currency board system?

Answer 27

Examples of countries using a currency board system include Hong Kong (pegged to the U.S. dollar) and Bulgaria (pegged to the euro).

Question 28

What is the significance of a "crawling peg" in exchange rates?

Answer 28

A crawling peg is a semi-fixed currency system where the exchange rate is adjusted gradually in response to changes in the economy.

Question 29

What is the difference between fully-fixed and conventional exchange rate pegs?

Answer 29

Fully-fixed exchange rates require intervention to maintain the peg, while conventional pegs allow for limited adjustments in the currency's value.

Question 30

How does the U.S. dollar impact global finance?

Answer 30

The U.S. dollar remains a dominant global currency due to its deep liquidity, widespread use, and the geopolitical strength of the U.S.

Question 31

What was the impact of the U.S. sanctions on Russia's foreign reserves in 2022?

Answer 31

The sanctions demonstrated the financial power of the U.S. and NATO, as Russia was unable to access its $500 billion in foreign reserves, highlighting the dollar's dominance.

Question 32

Why have countries like China and Russia explored alternatives to the U.S. dollar?

Answer 32

They have sought alternatives to reduce their vulnerability to U.S. economic sanctions and the dollar’s dominance in global trade.

Question 33

What caused the sharp appreciation of the U.S. dollar in 2022?

Answer 33

The Federal Reserve’s tightening monetary policy to combat inflation led to a 15% appreciation of the U.S. dollar in 2022.

Question 34

What global repercussions arose from the U.S. dollar appreciation in 2022?

Answer 34

Higher borrowing costs for countries with dollar-denominated debt, depreciation of emerging market currencies, and intensified inflation pressures were key global effects.

Question 35

What are the winners and losers of a strong U.S. dollar?

Answer 35

Winners include countries holding dollar-denominated assets, while losers are economies with significant dollar-denominated debts, such as Sri Lanka and Argentina.

Question 36

What are the implications of a strong dollar for low-income economies?

Answer 36

Low-income economies face debt distress, inflation, and economic instability due to their vulnerability to high-interest rates and dollar-denominated loans.

Question 37

What role do Federal Reserve swap lines play during global financial crises?

Answer 37

Federal Reserve swap lines provide liquidity to foreign central banks, stabilizing the global financial system during times of crisis.

Question 38

How does the U.S. dollar system amplify global inequalities?

Answer 38

The dollar system benefits wealthier economies but exacerbates the vulnerabilities of poorer nations, which suffer from higher debt costs and inflation.

Question 39

What are the long-term risks to the U.S. dollar’s dominance?

Answer 39

While the dollar remains dominant, its centrality could be challenged by a multipolar currency system or through the development of digital currencies by central banks.

Question 40

How has the U.S. Federal Reserve’s response to inflation affected global financial conditions?

Answer 40

The Fed’s rate hikes have caused global financial strain, especially for countries with dollar-denominated debts, leading to economic instability in many regions.

Question 41

What would a "soft landing" scenario for the U.S. economy entail?

Answer 41

A soft landing would involve mild recessionary conditions in the U.S. while successfully controlling inflation, easing global financial pressures.

Question 42

What factors reinforce the resilience of the U.S. dollar system?

Answer 42

The dollar’s deep liquidity, widespread use in global trade, and the U.S. geopolitical and economic stability contribute to the resilience of the dollar system.

Question 43

Why is a diversified reserve currency system considered beneficial?

Answer 43

A diversified reserve currency system reduces reliance on the U.S. dollar, providing stability and reducing the risks associated with the dollar’s fluctuations.

Question 44

How does a stronger U.S. dollar affect global trade?

Answer 44

A is the challenge of Europe's incomplete financial union?** The lack of a full financial union means Europe does not have sufficient risk-sharing mechanisms, which weakens the euro’s resilience in times of crisis.

Question 45

How does a multipolar currency system differ from a unipolar one?

Answer 45

A multipolar currency system features multiple dominant currencies (like the euro and the U.S. dollar), while a unipolar system centers around a single dominant currency.

Question 46

What does it mean if a currency is undervalued according to the Big Mac Index?

Answer 46

If a currency is undervalued, the price of a Big Mac in that country is cheaper than in the U.S., suggesting that the currency’s exchange rate is lower than its “fair value.”

Question 47

What does the adjusted Big Mac Index account for?

Answer 47

The adjusted Big Mac Index accounts for factors like wages and productivity, reflecting the reality that poorer countries have lower prices due to lower incomes.

Question 48

What are the criticisms of using the Big Mac Index for currency speculation?

Answer 48

The Big Mac Index is not reliable for short-term currency trading due to its limitations in predicting profitable currency movements.

Question 49

How do free-floating exchange rates work?

Answer 49

Free-floating exchange rates are determined by market forces without central bank intervention, with currency values fluctuating based on supply and demand.

Question 50

What is the role of central banks in managed-floating exchange rates?

Answer 50

In managed-floating exchange rates, central banks occasionally intervene to stabilize or adjust currency values by buying or selling foreign exchange reserves.

Question 51

What are fixed exchange rates, and how do they work?

Answer 51

Fixed exchange rates are set by a central bank and pegged to another currency. The central bank must maintain enough foreign reserves to manage the peg.

Question 52

What is a currency board system?

Answer 52

A currency board system requires a country’s domestic currency to be fully backed by a foreign reserve currency at a fixed exchange rate, ensuring the domestic currency is convertible at that rate.

Question 53

What is an adjustable peg exchange rate system?

Answer 53

An adjustable peg system involves occasional adjustments to a fixed currency peg, which must be officially sanctioned by the IMF

Question 54

What are the key features of a managed floating currency system?

Answer 54

Managed floating currencies are primarily driven by market forces, but central banks intervene when necessary to influence currency value and support domestic policies.

Question 55

How do economies benefit from a strong, diversified global currency system?

Answer 55

A diversified currency system helps stabilize the global financial framework by offering alternatives to the dominant U.S. dollar, reducing reliance on one currency.

Question 56

What is the potential role of digital currencies in the global financial system?

Answer 56

Central bank-issued digital currencies, like a digital euro, could reshape the international reserve system by providing more balanced alternatives to the U.S. dollar.

Question 57

Why did Russia’s response to financial sanctions highlight the U.S. dollar’s dominance?

Answer 57

Russia’s efforts to reduce reliance on the U.S. dollar after financial sanctions showed how much global trade and reserves depend on the dollar

Question 58

What was the impact of the Federal Reserve's tightening monetary policy in 2022?

Answer 58

The Fed's tightening policy led to a sharp appreciation of the U.S. dollar, causing financial strain on countries borrowing in dollars and resulting in depreciation of emerging market currencies.

Question 59

How does a strong dollar impact global trade?

Answer 59

A 1% rise in the dollar can reduce global trade by 0.7%, making it more expensive for countries to import and export goods.

Question 60

Who are the winners and losers when the U.S. dollar strengthens?

Answer 60

Winners include those holding dollar-denominated assets, while losers are economies with large dollar-denominated debts, such as Sri Lanka and Argentina.

Question 61

Why are low-income countries particularly vulnerable to a strong dollar?

Answer 61

Low-income countries, with significant dollar-denominated debt, face increased financial crises due to higher borrowing costs and currency depreciation.

Question 62

How do public-private partnerships like Federal Reserve swap lines stabilize the dollar system?

Answer 62

Federal Reserve swap lines help stabilize the system by allowing central banks to exchange currencies during crises, supporting global liquidity.

Question 63

What factors contribute to the U.S. dollar's continued dominance in global finance?

Answer 63

The U.S. dollar remains dominant due to its deep liquidity, widespread acceptance in trade and finance, and the U.S.'s economic and geopolitical power.

Question 64

What are the global implications of the dollar’s dominance?

Answer 64

The dollar’s dominance benefits U.S. interests but creates inequalities, with weaker economies struggling due to the dollar’s influence on trade and financial stability.

Question 65

What is the impact of the U.S. Federal Reserve’s actions on global financial conditions?

Answer 65

The Fed’s decisions, especially regarding interest rates, directly affect global financial conditions, influencing exchange rates and economic stability worldwide.

Question 66

What is the concept of "strategic autonomy" in Europe’s financial strategy?

Answer 66

Strategic autonomy refers to Europe's desire to reduce its reliance on the U.S. dollar, seeking greater control over its financial system and independence from U.S. monetary policy.

Question 67

What is the long-term outlook for the euro as a global reserve currency?

Answer 67

The euro may not dethrone the dollar but could gain a larger share of global finance, providing a counterbalance to the dollar’s dominance over time.

Question 68

How does the euro’s expansion benefit global financial stability?

Answer 68

A stronger euro reduces reliance on the dollar, potentially mitigating disruptions caused by changes in U.S. monetary policy, contributing to global financial stability.

Question 69

What challenges must be addressed for the euro to play a larger role in global finance?

Answer 69

The euro faces challenges like structural weaknesses, lack of financial union, and smaller debt issuance compared to the U.S., limiting its potential to rival the dollar.

Question 70

Why is the euro considered a diversification tool for the global monetary system?

Answer 70

The euro is seen as a diversification tool that helps reduce the disruption caused by U.S. monetary policy, offering an alternative for international trade and reserves.

Question 71

How did Europe’s response to the pandemic help bolster confidence in the euro?

Answer 71

The European Central Bank’s swift actions and the creation of the NGEU bonds improved confidence in the euro as a resilient and reliable currency during the crisis.

Question 72

What are the long-term implications of the dollar's "exorbitant privilege"?

Answer 72

The dollar’s dominant role in global finance may diminish over time, but it currently allows the U.S. to exercise significant control over global trade and financial systems.

Question 73

How does a currency board system differ from a fixed exchange rate system?

Answer 73

A currency board system requires full backing of domestic currency by foreign reserves at a fixed rate, while a fixed exchange rate system may allow occasional adjustments or interventions.

Question 74

What is a managed float exchange rate system’s role in domestic monetary policy?

Answer 74

A managed float system allows central banks to intervene occasionally to stabilize or influence the currency, making exchange rates a key tool for managing inflation and trade balance

Question 75

Why is the U.S. dollar referred to as an "exorbitant privilege"?

Answer 75

The dollar’s dominant role in global finance allows the U.S. to benefit from lower borrowing costs and economic leverage, a privilege not available to other countries with less dominant currencies.