Exam 1 Guide
A. Current issues with the IMF
1. Currency crises: coming up
a) Credibility/inappropriate policies
2) Recommended Practices
3) Voting power allocation
a) U.S. and Europe possess extreme amount power; If the IMF wants to pass a decision, they need to get the support of EU and US b) Moral Hazard?
1) Dismantle the organization: Don’t Manage the economy and let your inflation get to high but if it does occur, they have a safety net if they do something wrong c) Lack of accountability?
I. The Role of the World Bank
A. World Bank (IBRD) role- International Bank for restruction and Development 1. Refinanced post-WWII resconstruction and development 2. Provides low-interest long term loans to developing economies B. The International Development Agency (IDA), arm of the bank created in 1960 1. Raises funds from member states
2. loans only to poorest countries
3. 50 year repayment at 1% per year interest
C. Issues related the World Bank
1. Voting Power
a) No accountability; a country may follow the the guidelines but corruption usually is involved and it ultimately results in the country becoming more engrained in debt 3. Future role?
Currencies in Crisis
A. What were the causes of the Asian Financial Crisis?
1. Japanese economy was a bubble economy; it was slow to adapt to changes (closed economy/culture) 2. Government played a major role
3. Thailand kept its currency artificially high
a) Thailand currency was fixed to the dollar; people began to question whether they could actually back up what they are saying. b) More and more people started to ask for the currency and the country did not have enough. 1) Eventually they had to devalue their currency resulting in currency decrease 2) Thailand received an IMF loan and eventually they asked the U.S. for more money B. What does a drastically reduced currency value mean for citizens of that nation? For other nations? 1. Thailand sparked a global crises; U.S. chose not to intervene because they did not think there would be a “contagion” 2. Other people started to question whether other economies also have flaws and they all had other countries questioning their currency 3. Thailand => Malaysia => Indonesia (social fabric was brought into question) 4. IMF intervene requiring the countries to cut debt, increase interest rates, and reduce corruption 5. IMF conditions were viewed as a new form of colonialism; undermine the developing questions 6. Korea was even effected
a) Korea was claiming it had enough money to withstand the crisis, but it did not in fact have enough money to back up claims b) Korea received 55 billion dollars in bailout money => in order to avoid defaulting loans 7. Investors take investments to Russian; but Russia was eventually effected a) As a result, investors began to fear everything and investment funding halted 8. Long Term Capital Management (LCTM) had 100 billion dollars (very small)- hedge fund involved in many markets throughout the world a) Company was a privately funded; in turn, they could not be funded by the government 9. Crisis Spread to Brazil, the issue was controlled and the markets were able to return to normal C. Based on this video, what should nations be doing now to lessen the chance for similar crises?
CH 1: Globalization
I. What is globalization
A. Changes in the density of global interactions relative to national ones.” B. The expansion, concentration and acceleration of worldwide relations. II. What are globalization of markets?
A. moving away from an economic system in which national markets are distinct entities, isolated...
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