1. The Euro appreciated about 15% against the U.S. dollar from January 2008 to November 2009. What impact did this have on consumers and businesses in the U.S. and in the Eurozone area of Europe? Is a falling dollar good or bad for the U.S.? Explain.
This phenomenon caused a decrease of demand of Euro zone goods in the U.S. and the international market as well as increase in demand of U.S. goods as they became cheaper compared to those of the Euro zone. Therefore, this phenomenon was good for the U.S.
2. What are the forces that might cause a currency’s value to change relative to other currencies?
These are: currency appreciation/depreciation, rate manipulation, if one currency is fixed (pegged) to the value of another currency, interest rates & inflation and speculation.
3. Identify factors that contributed to the recent global financial crisis. Explain the implications of this crisis for global political economy.
Some of the contributing factors where:
• Global economic imbalance
• US economic regulatory regime that led to a mishandling of imprudent lending practices.
• Myopic ideology that promoted globalization and the ¨magic of the market¨ without accounting for market failure and the impact of lax regulatory regimes.
• Unethical and illegal behavior by some individuals and companies.
• Week global governance
Because of the bubble created by subprime mortgages from US and the downward spiral derived from it globally the necessity to review regulation and control over economic institutions has arose. As the consequences of these phenomenon started to appear globally it became clearer that it was a chain of hazardous actions and decisions from various economic entities globally that allowed this serious problem to develop up to the huge scale it rose to.
4. The prisoner’s dilemma illustrates an important conflict between individual and group interests. Discuss the meaning and significance of the prisoner’s dilemma and explain how it applies to the debt crisis.
The prisoner’s dilemma presents a scenario where even though cooperating is in the best interest of two conflicting sides these sides are not willing to cooperate.
By analyzing this dilemma we better understand the difficulty of finding a balance between cooperation and competition. If each side pursues its particular interest knowing that it will not benefit the other side then they are better off looking for their own benefit. It applied to the debt crisis as banks had to accept erasing each other’s debt for mutual benefit but where not willing to do so. This situation led to President George Bush Brady Plan, with which debt was swapped with bonds that would later be exchanged for new loans. 