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This 2 page Class Notes was uploaded by Greg Caceres-Munsell on Saturday November 7, 2015. The Class Notes belongs to ECON 103 at University of Illinois taught by Baer, W in Summer 2015. Since its upload, it has received 32 views. For similar materials see Macroeconomic Principles in Economcs at University of Illinois.
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Date Created: 11/07/15
1172015 OneNote Online Lecture 1920 Monday November 2 2015 1002 AM History of International Payments Gold Standard was used up until WWI o Abandoned during war to create new currency and fund war deficit Gold Standard reinstated after WWI o Deficit result from war lead to recession among many countries after reintroducing OldGold Standard relative to US lack of inflation Great Depression of 1930s 0 US GDP dropped 3333 industrial production dropped 50 0 US Imports declined from 44 B 1929 to 13 B 1932 0 US Service Payments decreased from 2 B to 1 B 0 US Long term lending ceased and net trade of capital had an inflow trade deficit Worth 251 M by 1932 0 US turns 39protectionist39 by Smoot Hawley Tariff of 1930 Worsened international depression Retaliationm 0 Europe abandons Gold standard 0 Adoption of exchange and other trade controls most currencies become inconvertible Competitive devaluations quotbeggar thy neighborquot policies 0 Devalue currencym Export unemployment 0 Results in international bartering extends life of depression 0 1930s Trade Restrictions 0 Competitive devaluations disallowed o Decline of trade as countries resorted to bilateral trade agreements Bretton Woods System 0 Adopted by all WWII allies apart from Soviets and any satellites New Establishments 0 International Monetary Fund IMF 0 World Bank quotInternational Bank for Reconstruction and Developmentquot Guaranteedsupported by US Treasury 0 General Agreement on Tariffs and Trade GATT System of Pegged Exchange Rates 0 Devaluations must be sanctioned by IMF 0 Fair and allowed to devalue if sanctioned no retaliation results 0 International currency was US backed by Gold Became reserve currency when held outside of US US valued at 351oz Au International currency quotneedsquot to grow Fixed value of US due to fixed value of Gold eventually cast aside Decline of the Bretton Woods System 0 As World economy grows market for US needs to grow mBy 1965M US Gold reserves 155 B 0 US liabilities 24 B 0 People grew uneasy over the lack of gold reserves in the case that people would not actually get gold out of their US Some held onto due to trade diplomacy efforts Some still demanded gold in hand By 1971M US gold reserves 10 B US liabilities 80 B quotWhy not devalue the USquot This would reward economic enemies and punishing economic alliesm Crisis of confidence results in Smithsonian Agreement of 1971 US lost its gold backing Gradual introduction of flexible exchange rates in major industry countries Gold speculationpurchasingselling as a commodity began US was ultimately devalued as a natural result Imports declined https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2SKYWACWSH ampui en U Samprsen U S 12 1172015 OneNote Online 0 From 19801985 High interest rates already suffered Reagan lowered taxes thus increased consumer expenditures and increased military spending Resulting deficit funded by borrowing leading to even higher interest rates 0 Interest rates result in high demand for dollars Appreciation occurs attracts capital causes trade deficit Domestic manufacturers suffer at the hand of increased imports o Plaza Agreement of 1985 To devalue US according to appreciation crisis mentioned above From 19801985 Devalued by 30 against Japanese Yen 25 against European currencies Did not immediately improve US trade balance Generally how devaluation works habitspurchase amp sale of goods have sticky behavior Elasticity Even once improvement occurred it was not as much as expected Trade with Japan hardly changed at all Lags of trade with changing exchange rates was due to long term contracts 0 Dispute with Japan Import restrictions disagreed upon Japan did not raise US prices according to appreciation of Yen https onenoteoffi ceapps ivecomoonenoteframeaspxF i SD F483C578388F D48D 413ampH em ul ampC 5810D M 2SKY WACWSH ampui en U Samprsen U S 2Q