20. Explain what is meant by purchasing power parity (PPP), and purchasing power parity (PPP) adjustments. Chapter 14 - The Global Economy and Policy 3 21. Explain what happens to the value of the currency when there's an increase ( or decrease) in the supply (or demand) of the currency in a foreign exchange market with flexible exchange rates. 22. Explain what is meant by the balance of payments account, the current account (in the BOP account), and the capital account (in the BOP account). 23. Describe the impact of an expansionary monetary policy in an open economy. 24. Why do some countries try to control the value of their currencies through a fixed exchange rate system? And how can they do so? 25. How has the adoption of the euro affected monetary policy-making in the Eurozone countries? 26. What are the international institutions of the "Washington Consensus", and what were the policy prescriptions they imposed on many developing countries in the 1980s and 1990s?Problems 1. Jane Doe has the following assets. $100 in her wallet $800 in her checking account $1,000 in her savings account A $20 traveler's check from her last business trip to China. A $300 outstanding credit card bill. $3,000 in a small certificate of deposit A car worth $5,000. A house, worth $200,000. a Identify which are in MI, which are in M2, or in neither MI nor M2. b. Suppose she takes the $100 in her wallet and deposits it in her checking account. What is the change in MI and M2? c. Suppose she takes $400 from her checking account and deposits it in her savings account. What is the change in MI and M2? 2. Assume a required reserve ratio of 0.10 to complete the following. Assets Liabilities & Net Worth Reserves $ 150 million Deposits $ 500 million Loans $ 250 million Bank Capital $ 25 million Bonds $ 125 million TOTAL: 525 Million TOTAL: $ 525 Million a) Calculate the initial required reserves for this bank. b) Calculate the initial excess reserves for this bank. c) Convert all of the excess reserves into loans. Construct the new balance sheet.1. Suppose the U.S. government puts a tax on the imports of steel produced abroad. Such taxes charged on imports or exports are called 2. Policies that provide subsidies to domestic producers to encourage the production of goods for domestic market and reduce the quantity of imports are called _ policies. 3. Countries sometimes set up within their borders, where foreign-owned manufacturers can operate free of many taxes, tariffs, and regulations. 4. refer to the regulation or taxation of international transactions involving financial assets. 5. The exchange rate between two currencies, when adjusted for inflation in each country, is known as the 6. A_ can occur when a country gets precariously close to running out of foreign exchange and is therefore unable to purchase imports or service its existing debt. 7. The notion that, under certain idealized conditions, the exchange rate between the currencies of two countries should be such that the purchasing power of currencies is equalized is called 8. The national account that tracks inflows and outflows arising from international trade, earnings, transfers, and transactions in assets is called the 9. The account that tracks flows arising from international transactions in assets is called the 10. Under a fixed exchange system, if a government lowers the value at which it fixes its exchange rate, the currency will undergo a Chapter 14 - The Global Economy and Policy True or False 11. Both quotas and tariffs provide a monetary revenue benefit to the government that has imposed them. 12. When a currency becomes less valuable in a flexible (floating) exchange rate system the correct term to use is "devaluation." 13. When foreigners buy U.S. bonds or invest in a U.S. business, these are capital outflows in the balance of payments account. 14. The fixed exchange rate system of Bretton Woods broke apart in 1972, when the U.S. dollar came under too much selling pressure. 15. Under a fixed exchange rate system, it becomes impossible for an individual country to conduct independent monetary policy (as exemplified by the case of the EU countries that have adopted the euro).1. The curve that shows how inflation is related to total demand, and indicates an inverse relationship between inflation and output, is called the curve. 2. The tendency for consumers to increase or decrease their consumption based on their perceived level of wealth is described as the effect. 3. The nominal money supply divided by the general price level is known as the 4. The curve that shows the combination of output and inflation that can occur in an economy, given the country's capacity constraints, is called the curve. 5. Assume that a nation is fully using every last one of its available resources in production. Then that nation would be operating at output. 6. When demand for labor and other resources is high, and that bids up wages, which in turn bids up prices as producers try to cover their higher cost of production, which then puts further upward pressure on wages as workers demand compensation for higher prices, etc., the result is what is called a 7. During WWII, the government established to keep inflation from spiraling out of control. 8. Something that changes the ability of an economy to produce goods and services (such as a natural disaster, a war, change in productivity, or change in the price of a key input like oil) is called a 9. The presence of both economic stagnation (with rising unemployment) and rising inflation is known as 10. Suppose people experience a higher level of inflation for a period of time, and begin to build in that higher rate of inflation into their contacts. This would be characterized as an increase in 1 1. (In appendix) The theory that changes in employment levels are caused by change in technological capacities or people's preferences concerning work is a theory associated with 12. (In appendix). The theory that said that people will use all available information, including rational anticipation of the Fed's monetary policy movements, and will immediately incorporate changes in inflationary expectations into their contracts, is associated with the school. Chapter 13 - Aggregate Supply, Aggregate Demand, and Inflation: Putting It All Together 2 13. (In appendix) A combination of classical and Keynesian views, with Keynesian theory applied to the short and medium run, but the classical view prevailing in the long run, is known as the 14. (In appendix) The school of thought which bases their analysis on rational, optimizing individuals and micro-level market behavior, but believes that the adjustment to full employment equilibrium could take a relatively long time, is called 15. (In appendix) The school of thought that believes that economies are unstable, that history matters, and that the future is often unpredictable, is called19. What were some of the factors leading to the housing bubble? 20. What were the major fiscal and monetary policy responses to the crisis? 21. In what ways can unemployment be both a result and a cause of deepening recession? 22. How does Minsky's theory explain the occurrence of financial instability in the economic system? 23. What are some of the factors explaining the rise of inequality in the United States in the past few decades? Chapter 15 - Financial Instability and Economic Inequality 3 24. How was globalization related to increasing inequality? 25. Discuss some of the ways in which financial resources may be directed towards more socially useful investments. Problems 1. Refer to Figure 15.2 in the text to describe how interest rates were related to the development and collapse of the housing bubble. 2. Refer to Figure 15.6 in the text to describe how the distribution of bank assets changed between 1984 and 2017. 3. As suggested in Exercise 1 in the text, you can find information on housing prices at The Federal Housing Finance Agency website www.thfa.gov. To find the required data, go to www.fhfa/gov/DataTools/Tools and select HPI Motion chart. Then check off the states you want to view (it is possible to view multiple states at the same time). Select the third tab at the top right (with graph symbol) to get a historical view of the rate of change in state housing prices from 1991 to the present. What do you observe? (Note that the chart shows quarterly rate of change, not absolute price levels, so overall prices start to fall when the line goes below zero.) 4. As suggested in Exercise 2 in the text, you can find data on the Great Recession at the Federal Reserve Economic Database http://research.stlouisfed.org/fred2/ To find data on unemployment rates, go to Current Population Survey/Unemployment Rate/Civilian Unemployment Rate/Seasonally Adjusted (do not select Natural Rate of Unemployment on the main Population, Employment, and Labor Markets page - this does not show total unemployment). Drag the cursor over graph to see the data on unemployment during the last four recessions. How does the Great Recession compare to previous recessions