Tuesday, April 27, 2010

WH II Honors: 28 April 2010

Current Events:

Israel's Dimona Nuclear Weapons Factory In 3D

Cf. Vanunu is an Israeli former nuclear technician who, citing his opposition to weapons of mass destruction, revealed details of Israel's nuclear weapons program to the British press in 1986. He was subsequently lured to Italy by a Mossad spy, where he was drugged and kidnapped by Israeli intelligence operatives. He was transported to Israel and ultimately convicted in a trial that was held behind closed doors.

Israel: WMD

Obama Administration Denies Visas to Israeli Nuclear Scientists

Ch. 17 Sec. 1 Quiz is on Thursday. Be sure to consider the Quiz Prep Page.

Ch. 17 Sec. 2 Quiz is on Monday. Be sure to consider the Quiz Prep Page.

Chapter 18: Nationalism Around the World, 1919–1939

Nationalism was a major force in the Middle East, Africa, and India after World War I. In China, the Nationalists forced the Communists into retreat and formed a republic. An expansionist military took power in Japan. Economic crisis led to military dictatorships throughout Latin America.

Section 1 Nationalism in the Middle East
World War I was the final blow for an Ottoman Empire in its decline since the late eighteenth century. One of its final acts was an act of genocide, the slaughter of Armenians seeking independence. Nationalist leaders in the collapsing empire established the independent states of Turkey, Iran, and Saudi Arabia. Britain and France withdrew their promised support for Arab nationalists and set up British mandates in Iraq and Jordan, and French mandates in Lebanon and Syria. Saudi Arabia had vast supplies of newly discovered oil and suddenly attracted Western oil companies that would bring the kingdom untold wealth. Palestine became a site of conflict beginning with the British Balfour Declaration of 1917, which declared Palestine the site for a Jewish homeland. Tensions between Jews and Muslims only worsened as Jewish immigrants fleeing Nazi persecution flooded Palestine.

Section 2 Nationalism in Africa and Asia
After World War I, Germany lost its African colonies to Britain and France. Violent suppression and the slow pace of reform in the colonies led many Africans to agitate for independence. Two African Americans, W.E.B. Du Bois and Marcus Garvey, were influential in building African cultural awareness and Pan-African unity. Mohandas Gandhi built a large movement for Indian independence through nonviolence. Indian Muslims felt sidelined by the largest independence organization, the Indian National Congress, and called for a separate Muslim state. Rapid industrialization in Japan led to support for territorial expansion to improve Japan's access to raw materials and markets. After a period of pacifism prompted in part by pressure from the United States, Japan conquered Manchuria, and the military took control of the government. The Communist International helped build Communist parties in China and Southeast Asia.

Section 3 Revolutionary Chaos in China
As central authority collapsed in China, rival Nationalist and Communist Party forces briefly joined ranks. The two groups split after a Nationalist massacre of Communists. The Nationalists, led by Chiang Kai-shek, founded a new Chinese republic in 1928. The Communists, led by Mao Zedong, went into hiding in the cities. Mao's plans, however, were for a revolution led by peasants. In 1933 Mao's forces used guerrilla tactics to break through Nationalist lines closing in on them. They then began the Long March to the last surviving Communist base. Chiang had plans for land reform and a Western-style constitutional government. To make Western ideas palatable, he blended them with Confucian themes. Although he did achieve some meaningful reforms, Chiang's support came mainly from the rural gentry and the urban middle class; his reforms did little to redistribute wealth.

Section 4 Nationalism in Latin America
American investors directly controlled many Latin American industries beginning in the 1920s. Latin American nationalists claimed that U.S. investments propped up the regions' dictators. The Great Depression weakened regional economies and led to the creation of government-run industries, since Latin Americans could not afford many imported goods. Economic crisis and instability prompted military leaders to overthrow the elected governments—which were dominated by small elites—and to establish authoritarian regimes. Dictators sometimes gained an urban following by promising better factory conditions. Industrialization became a core government project. Fascist symbols and nationalist slogans were used amid harsh political repression. In Mexico, a single-party state dominated society. The popular Depression-era leader Lázaro Cárdenas nationalized foreign-owned oil companies and redistributed land to Mexican peasants. Artists helped build national identity in many Latin American countries.

Gandhi's March to the Sea

Note Taking

Identify Causes and Effects

Recognizing causes and effects can help you understand the significance of certain events. In a chart like the one below, record the causes and effects of Gandhi’s leadership of India’s independence movement.

To mobilize mass support, Gandhi decided to take a stand against the British salt monopoly, which he saw as a symbol of British oppression. Natural salt was available in the sea, but the British government required Indians to buy only salt sold by the monopoly.

On March 12, 1930, Gandhi set out with 78 followers on a 240-mile march to the sea. As the tiny band passed through villages, crowds responded to Gandhi’s message. By the time they reached the sea, the marchers numbered in the thousands. On April 6, Gandhi waded into the surf and picked up a lump of sea salt. He was soon arrested and jailed. Still, Indians followed his lead. Coastal villages started collecting salt. Indians sold salt on city streets. As Gandhi’s campaign gained force, tens of thousands of Indians were imprisoned.

All around the world, newspapers criticized Britain’s harsh reaction to the protests. Stories revealed how police brutally clubbed peaceful marchers who tried to occupy a government salt works. Slowly, Gandhi’s campaign forced Britain to hand over some power to Indians. Britain also agreed to meet other demands of the Congress party.

Mohandas Gandhi: Hind Swaraj

Section 1 Nationalism in the Middle East

Section 1 Nationalism in the Middle East
World War I was the final blow for an Ottoman Empire in its decline since the late eighteenth century. One of its final acts was an act of genocide, the slaughter of Armenians seeking independence. Nationalist leaders in the collapsing empire established the independent states of Turkey, Iran, and Saudi Arabia. Britain and France withdrew their promised support for Arab nationalists and set up British mandates in Iraq and Jordan, and French mandates in Lebanon and Syria. Saudi Arabia had vast supplies of newly discovered oil and suddenly attracted Western oil companies that would bring the kingdom untold wealth. Palestine became a site of conflict beginning with the British Balfour Declaration of 1917, which declared Palestine the site for a Jewish homeland. Tensions between Jews and Muslims only worsened as Jewish immigrants fleeing Nazi persecution flooded Palestine.

Note Taking

Reading and Listening Skill: Identify Causes and Effects

Record reasons for the rise of nationalism in Africa and the Middle East and its effects in a chart like the one below.

Decline and Fall of the Ottoman Empire

Impact of World War I
Nationalist movements brought immense changes to the Middle East in the aftermath of World War I. The defeated Ottoman empire was near collapse in 1918. Its Arab lands, as you may have read, were divided between Britain and France. However, in Asia Minor, the Turkish peninsula between the Black Sea and the Mediterranean Sea, Turks resisted Western control and fought to build a modern nation.

Massacre of the Armenians

"1915 Armenian genocide" resolution approved, 2:51

The U.S. House of Representatives' Foreign Affairs Committee has passed a resolution recognizing the 1915 Armenian massacre as genocide. The Turkish President says the decision is unacceptable and is not regarded by the Turkish people as of any value.

Emergence of the Turkish Republic
In 1920, the Ottoman sultan reluctantly signed the Treaty of Sèvres, in which the empire lost its Arab and North African lands. The sultan also had to give up some land in Asia Minor to a number of Allied countries, including Greece. A Greek force landed in the city of Smyrna (now Izmir) to assert Greece’s claims. Turkish nationalists, led by the determined and energetic Mustafa Kemal, overthrew the sultan, defeated the Greeks, and declared Turkey a republic. Kemal negotiated a new treaty. Among other provisions, the treaty called for about 1.3 million Greeks to leave Turkey, while some 400,000 Turks left Greece.
Kemal later took the name Atatürk (ah tah turk), meaning “father of the Turks.” Between 1923 and his death in 1938, Atatürk forced through an ambitious program of radical reforms. His goals were to modernize Turkey along Western lines and to separate religion from government. To achieve these goals, Atatürk mandated that Islamic traditions in several fields be replaced with Western alternatives (see Biography).

Atatürk (1881–1938)

President Kennedy - Speech about Ataturk, 1:56

“Atatürk” is the name that Mustafa Kemal gave himself when he ordered all Turkish people to take on surnames, or last names. It means “Father of the Turks.” In 1920, he led Turkish nationalists in the fight against Greek forces trying to enforce the Treaty of Sèvres, establishing the borders of the modern Republic of Turkey. Once in power, he passed many reforms to modernize, Westernize, and secularize Turkey. Atatürk is still honored throughout Turkey today—his portrait appears on postage and all currency. Why is Atatürk considered the “Father of the Turks”?

Reading Check


How did the Ottoman Empire finally end?

The Modernization of Turkey

Atatürk’s Reforms in Turkey

*Replaced Islamic law with European model
*Replaced Muslim calendar with Western (Christian) calendar
*Moved day of rest from Friday to Sunday
*Closed religious schools and opened state schools
*Forced people to wear Western-style clothes
*Replaced Arabic alphabet with Latin alphabet
*Gave women the right to vote and to work outside the home.

Westernization Transforms Turkey

Atatürk’s government encouraged industrial expansion. The government built railroads, set up factories, and hired westerners to advise on how to make Turkey economically independent.

To achieve his reforms, Atatürk ruled with an iron hand. To many Turks, he was a hero who was transforming Turkey into a strong, modern power. Others questioned Atatürk’s dictatorial powers and complete rejection of religion in laws and government. They believed that Islam could play a constructive role in a modern, civil state.

In 1924, Atatürk, as part of his reforms, constitutionally abolished the institution of the Caliphate. The title was then taken up by King Hussein bin Ali of Hejaz, leader of the Arab Revolt, but his kingdom was defeated and annexed by Ibn Saud in 1925. The title has since been inactive.

A summit was convened at Cairo in 1926 to discuss the revival of the Caliphate, but most Muslim countries did not participate and no action was taken to implement the summit's resolutions.
Though the title was adopted by the King of Morocco and by Mullah Mohammed Omar, former head of the now-defunct Taliban regime of Afghanistan, neither claimed any legal standing or authority over Muslims outside the borders of their respective countries.

The closest thing to a Caliphate in existence today is the Organisation of the Islamic Conference (OIC), an international organization with influence founded in 1969 consisting of the governments of most Muslim-majority countries. In fact, the "OIC Fulfills Function of Caliphate, Embodies ‘Islamic Solidarity,’ Says OIC Chief, according to a recent news story.

Rashad Hussain is the current American representative to the OIC.

In 2004, Hussain was on a panel discussion on civil rights at a Muslim Students Association conference in Chicago. With him on the panel was Laila Al-Arian, a daughter of Sami Al-Arian, who on March 2, 2006, entered a guilty plea to a charge of conspiracy to help the Palestinian Islamic Jihad, a "specially designated terrorist" organization, and was sentenced to 57 months in prison, and ordered deported following his prison term. During the panel discussion, and following Laila Al-Arain's comments, Hussain made critical statements about the U.S. terror prosecution of Sami Al-Arian, as well as other Muslim terrorism suspects, characterizing them as "politically motivated persecutions."

Hussain later acknowledged that he was accurately quoted in 2004 as calling the treatment of Sami al-Arian as an example of “politically motivated persecutions.” Hussain made the admission after Politico acquired an audio recording of the Muslim Students Association event, and his comments. Hussain stated that he "made statements on that panel that I now recognize were ill-conceived or not well-formulated." Earlier, Hussain – through White House spokesmen – said he could not recall having made the statements." After Hussain's statement, the White House stated that it "is expressing its confidence in Hussain, despite his concession last week that he made ill-considered statements in 2004 about Bush-era terrorism prosecutions."

Reading Check


What radical step did Ataturk Take to modernize Turkey?

The Beginnings of Modern Iran

The success of Atatürk’s reforms inspired nationalists in neighboring Persia (present-day Iran). Persian nationalists greatly resented the British and Russians, who had won spheres of influence over Persia in 1907. In 1925, an ambitious army officer, Reza Khan, overthrew the shah. He set up his own dynasty, with himself as shah.

Like Atatürk, Reza Khan rushed to modernize Persia and make it fully independent. He built factories, roads, and railroads and strengthened the army. He forced Persians to wear Western clothing and set up modern, secular schools. In addition, he moved to replace Islamic law with secular law and encouraged women to take part in public life. Muslim religious leaders fiercely condemned Reza Khan’s efforts to introduce Western ways to the nation.

Reza Khan also persuaded the British company that controlled Persia’s oil industry to give Persia a larger share of the profits and insisted that Persian workers be hired at all levels of the company. In the decades ahead, oil would become a major factor in Persia’s economy and foreign policy.

Reading Check


How was Reza Shah Pahlavi's modernization of Persia different from Ataturk's transformation of Turkey?

Arab Nationalism

Oil became a major factor throughout the Middle East during this period. The use of gasoline-powered engines in various vehicles during World War I showed that oil was the fuel of the future. Foreign companies began to move into the Middle East to exploit its large oil reserves.

Partly in response to foreign influence, Arab nationalism grew after World War I and gave rise to Pan-Arabism. This nationalist movement was built on the shared heritage of Arabs who lived in lands from the Arabian Peninsula to North Africa. Today, this area includes Syria, Jordan, Iraq, Egypt, Algeria, and Morocco. Pan-Arabism emphasized the common history and language of Arabs and recalled the golden age of Arab civilization. The movement sought to free Arabs from foreign domination and unite them in their own state.

The Middle East, 1920s, Cf. http://www.phschool.com/webcodes10/index.cfm?fuseaction=home.gotoWebCode&wcprefix=nap&wcsuffix=2721

Map Skills

Population movements and foreign influences changed the Middle East after World War I.

1. Locate

(a) Turkey (b) Persia (c) Palestine (d) the Persian Gulf

2. Human-Environment Interaction

What natural resource was discovered in the Middle East around this time? What effect did its discovery have on the region?

3. Make Inferences

List the ways foreign influence affected the Middle East in the 1920s.

Arabs were outraged by the European-controlled mandates set up at the Paris Peace Conference. During World War I, Arabs had helped the Allies against the Central Powers, especially the Ottoman empire. In return for their help, the Allies led the Arabs to believe that they would gain independence after the war. Instead, the Allies carved up the Ottoman lands, giving France mandates in Syria and Lebanon and Britain mandates in Palestine and Iraq. Later, Britain gave a large part of the Palestinian mandate, Trans-Jordan to Abdullah for a kingdom.

Arabs felt betrayed by the West—a feeling that has endured to this day. During the 1920s and 1930s, their anger erupted in frequent protests and revolts against Western imperialism. A major center of turmoil was the British mandate of Palestine. There, Arab nationalists and Jewish nationalists, known as Zionists, increasingly clashed.

Reading Check


How were many Middle Eastern states created after World War I?

The Problem of Palestine

Two Views of One Place

Posters encouraged visitors and settlers to go to Palestine. At the same time, Palestinian Arabs tried to limit Jewish settlement in the area.
The Arab-Israeli Conflict: A Brief History

Since Roman times, Jews had dreamed of returning to the land of Judea, or Israel. In 1897, Theodor Herzl (hurt sul) responded to growing anti-Semitism, or prejudice against Jewish people,in Europe by founding the modern Zionist movement. His goal was to rebuild a Jewish state in Palestine. Among other things, violent pogroms against Jews in Russia prompted thousands of them to migrate to Palestine. They joined the small Jewish community that had lived there since biblical times.

During World War I, the Allies made two conflicting sets of promises. First, they promised Arabs their own kingdoms in former Ottoman lands, including Palestine. Then, in 1917, the British attempted to win the support of European Jews by issuing the Balfour Declaration. In it, the British advocated the idea of setting up “a national home for the Jewish people” in Palestine. The declaration noted, however, that “nothing shall be done which may prejudice the civil and religious rights of existing non-Jewish communities in Palestine.” Those communities were Arab. The stage was thus set for conflict between Arab and Jewish nationalists.

Vocabulary Builder

advocated—(ad vuh kayt id) v. supported or favored

From 1919 to 1940, tens of thousands of Jews immigrated to Palestine due to the Zionist movement and the effects of anti-Semitism in Europe. Despite great hardships, Jewish settlers set up factories, built new towns, and established farming communities. At the same time, the Arab population almost doubled. Many were immigrants from nearby lands. As a result, Palestine's population included a changing mix of newcomers. The Jewish population, which was less than 60,000 in 1919, grew to about 400,000 in 1936, while the Muslim population increased from about 568,000 in 1919 to about 1 million in 1940.

At first, some Arabs welcomed the money and modern technical skills that the newcomers brought with them. But as more Jews moved to Palestine, tensions between the two groups developed. Jewish organizations tried to purchase as much land as they could, while Arabs sought to slow down or stop Jewish immigration. Religious differences between Jews and Arabs heightened tensions. Arabs attacked Jewish settlements, hoping to discourage settlers. The Jewish settlers established their own military defense force. For the rest of the century, Arab and Jews fought over the land that Arabs called Palestine and Jews called Israel.

Reading Check


Why did the Balfour Declaration produce problems in Palestine?

Chapter 18 References

The End of the British Empire, Cf. http://www.nationalarchives.gov.uk/education/empire/g3/default.htm

Video clips of Gandhi and other Indian leaders

The life of Gandhi

Find out more about African independence

The Arab-Israeli Conflict: A Brief History

Middle East


Section 2 Preview

Ch. 17 Sec. 1 Quiz is on Thursday. Be sure to consider the Quiz Prep Page.

Ch. 17 Sec. 2 Quiz is on Monday. Be sure to consider the Quiz Prep Page.

Israeli Greeting Card for Passover: Who Let the Jews Out

How To Take Effective Notes
Email to gmsmith@shanahan.org

Wednesday: p. 556, History Through Art

Reading Check


Why were artists and writers after World War I attracted to Freud's theory of the unconscious?

AP Economics: 28 April 2010

Current Events:

Push for Tough Economic Control

Chapter 26

Chapter 26 Open Economy Macroeconomics
Chapter Overview
After covering the balance of payments, this chapter examines how exchange rates are determined and then relates them back to the current and capital accounts. Fixed and flexible exchange rate systems are then discussed in the context of monetary and fiscal policy effectiveness in an open economy.

Chapter Outline

The Current Account

Current account deficits and exchange rates, 4:34

The Current Account

Cf. http://www.youtube.com/watch?v=yCjwXz7ZXwU

Imports and Exports
The Capital Account, p. 669, Slide 7, Slide 8
Checkpoint: The Balance of Payments, p. 671, Slide 9
Exchange Rates, p. 671

Exchange Rates and Globalization, 3:03

Dr. Tawni Ferrarini's International Economics course at Northern Michigan University. The video simplifies the concepts of exchange rates and globalization and puts a real world perspective on those concepts.

Defining Exchange Rates, p. 671
Nominal Exchange Rates, p. 672

International Fisher Effect, 2:58

The International Fisher effect is a hypothesis in international finance that says that the difference in the nominal interest rates between two countries determines the movement of the nominal exchange rate between their currencies, with the value of the currency of the country with the lower nominal interest rate increasing. This is also known as the assumption of Uncovered Interest Parity.

Real Exchange Rates, p. 674

Purchasing Power Parity, Slide 11

"Big Mac," PPP - Purchasing Power Parity, Real Exchange Rates, 2:26

The purchasing power parity (PPP) theory uses the long-term equilibrium exchange rate of two currencies to equalize their purchasing power. Developed by Gustav Cassel in 1920, it is based on the law of one price: the theory states that, in ideally efficient markets, identical goods should have only one price.

This purchasing power exchange rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods. Using a PPP basis is arguably more useful when comparing differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of different countries, rather than just a nominal gross domestic product (GDP) comparison. The best-known and most-used purchasing power parity exchange rate is the Geary-Khamis dollar (the "international dollar").

PPP exchange rates (the "real exchange rate") fluctuations are mostly due to market exchange rates movements. Aside from this volatility, consistent deviations of the market and PPP exchange rates are observed, for example (market exchange rate) prices of non-traded goods and services are usually lower where incomes are lower. (A U.S. dollar exchanged and spent in India will buy more haircuts than a dollar spent in the United States). PPP takes into account this lower cost of living and adjusts for it as though all income was spent locally. In other words, PPP is the amount of a certain basket of basic goods which can be bought in the given country with the money it produces.

There can be marked differences between PPP and market exchange rates. [1] For example, the World Bank's World Development Indicators 2005 estimated that in 2003, one United States dollar was equivalent to about 1.8 Chinese yuan by purchasing power parity [2] — considerably different from the nominal exchange rate that put one dollar equal to 7.6 yuan. This discrepancy has large implications; for instance, GDP per capita in the People's Republic of China is about US $1,800 while on a PPP basis it is about US $7,204. This is frequently used to assert that China is the world's second-largest economy, but such a calculation would only be valid under the PPP theory. At the other extreme, Japan's nominal GDP per capita is around US $37,600, but its PPP figure is only US $30,615.

Exchange Rate Determination, p. 675
A Market for Foreign Exchange, p. 675, Slide 12
Flexible Exchange Rates, p. 676

1971, Nixon moves the world to flexible rates, 4:06

On August 15, 1971, President Nixon announced on TV 3 dramatic changes in economic policy. He imposed a wage-price freeze. He ended the Bretton Woods international monetary system. And he imposed a temporary surcharge (tariff) on all imports. The Bretton Woods system was created towards the end of World War II and involved fixed exchange rates with the U.S. dollar as the key currency - but also a role for gold linked to the dollar at $35/ounce. The system began to falter in the 1960s because of an excess of dollars flowing out of the U.S. which foreign central banks had to absorb. A run on gold in 1968 was stemmed by a patch on Bretton Woods known as the two-tier gold system. All of this was ended unilaterally by the Nixon decision. After a brief attempt to create a modified fixed exchange rate system, the world moved to flexible rates.

Currency Appreciation and Depreciation, p. 677, Slides 13 & 14

China Currency Revaluation Debate, 2:03

China Commerce Minister says appreciation of currency will do little improve balance of payments. Better cooperation in helping increase U.S. exports to China is discussed.

Determinants of Exchange Rates, p. 678, Slide 15

What Determines the Foreign Exchange Rate?, 2:13

To determine the foreign exchange rate for different currencies, check the local paper for exchange rates, and pay attention to the inflation rate. Avoid exchanging money with countries that spend more money than they bring in with advice from a financial consultant in this free video on currency exchange.

Expert: Roger Groh
Bio: Roger Groh is the founder of Groh Asset Management.

Exchange Rates and the Current Account, p. 678, Slide 16

Exchange rates, 1:45

Changes in Inflation Rates, p. 678

Changes in Domestic Disposable Income, p. 678
Exchange Rates and the Capital Account, p. 679, Slide 17
Interest Rate Changes, p. 679, Slide 18
Exchange Rate Changes
Exchange Rates and Aggregate Supply and Demand
Checkpoint: Exchange Rates
Monetary and Fiscal Policy in an Open Economy
Fixed and Flexible Exchange Rate Systems
Policies Under Fixed Exchange Rates
Policies Under Flexible Exchange Rates
Checkpoint: Monetary and Fiscal Policy in an Open Economy
Ideas for Capturing Your Classroom Audience
Here is a true story. On a flight from the United States to France the cabin crew
announced that wine, beer, etc. could be purchased for either 5 U.S. dollars or 4
euros. Who got the better deal, the people paying in U.S. currency or the people
paying in euros? This is a very simple example of purchasing power parity.
Play a game of name that currency. Pick a country (or a currency) and see if anyone can identify the currency (or country). Illustrate the various currencies of the world by visiting a Web site such as http://www.x-rates.com/. Among other things, this site provides you with the opportunity to calculate values in different currencies and generate graphs of currencies relative to each other over different periods of time.
Put it in context. Illustrate U.S. International Trade in Goods and Services with
the graph on this Foreign Trade Statistics page from the U.S. Census Bureau. This
will give students an overview of the size of U.S. trade. The page is located at:
Trade data is available on the Web site of the Bureau of Economic Analysis at
Do some international comparison shopping. Visit the Web sites of Amazon.com
in the United States and in the United Kingdom (www.amazon.com.uk). Find the
price in pounds and then translate it to U.S. dollars using the current exchange
rate. You can also do this by pointing out the two prices, one in Canadian dollars
and one in U.S. dollars, listed for greeting cards and paperback books.
Chapter Checkpoints
The Balance of Payments
Question: Ronald McKinnon, writing in the April 20, 2006 issue of The Wall Street
Journal, notes, China's saving is even higher than its own extraordinary high
domestic investment of 40% of GDP. . . . The result is that China (like many other
countries in Asia) naturally runs an overall current account surplus. . . .�Why would this be true? (Hint: look back at the discussion on the relationship between federal and trade deficits in the chapter on Deficits and the Public Debt.)

The point is to check that students can: apply the extended “leakages and injections” approach to the analysis of the cited article.
Exchange Rates
Question: If China were to revalue its currency by 10% so in effect the yuan appreciated by 10%, would this have an impact on the U.S. current account?

The point is to check that students can: integrate the understanding of the effect of changes in currency values on imports and exports and therefore on the current account.
Monetary and Fiscal Policy in an Open Economy
Question: The United States seems to rely more on monetary policy to maintain stable prices, low interest rates, low unemployment, and healthy economic growth.
Does the fact that the United States has really embraced global trade (imports and
exports combined are over 25% of gross domestic product) and we have a flexible
(floating) exchange rate help explain why monetary policy seems more important
than fiscal policy?

The point is to check that students can: understand how the exchange rate system
(fixed or flexible) impacts the effectiveness of monetary and fiscal policy.
Examples Used in the End-of-Chapter Questions
Question 2 refers to remittances. For a map illustrating the amounts of remittances to various countries see the Web site of the Multilateral Investment Fund from the Inter-American Development Bank. The site is located on the Web at: http://www.iadb.org/mif/remesas_map.cfm?language=English&parid=5&item1d=2.
Question 4 asks “how are most exchange rates determined?” and the answer is by
supply and demand in free markets. China has been viewed as an exception, but in
2005 the Chinese government took an important step toward allowing its currency
to float. For more information see the story by Peter S. Goodman in The
Washington Post titled, “China Ends Fixed-Rate Currency: Administration Hails
Policy Shift” (July 22, 2005, page A01, available on the Web at: http://www .washingtonpost.com/wp-dyn/content/article/2005/07/21/AR2005072100351.html.
Question 11 refers to the devaluation of Zimbabwe’s currency in mid-2006. But they
“only” (in simple terms) removed three 0’s. Turkey, in January 2005, took six 0’s off in the “redenomination” of their currency. Learn more about Turkey (and how things have worked out) on this site from the BBC: http://news.bbc.co.uk/1/hi/business/1833730.stm.
For Further Analysis
Using the AS/AD Model to Explore the Impacts of Changes in the Value of the
The example provided in the student handout can be used as an in-class small group
exercise or as an individual in-class exercise. It is designed to complement and
extend the text’s material exchange rates and their effect on the U.S. economy using the AS/AD model. The exercise begins with the analysis described by Figure 4 in the chapter and then has students consider the opposite case (of dollar appreciation).
The exercise concludes asking students to evaluate the differing effects and
address the question of “what’s better” for the U.S. economy: a strong dollar or a
weak dollar?
The format of the exercise asks students to demonstrate their understanding by
analyzing a reverse situation to that described in the text. It also provides a chance to introduce students to the debates about economics and to get them to think about whether appreciation or depreciation is better for an economy and whether it benefits or hurts certain portions of society.
If you wish to elaborate on the analysis you can ask students to consider financial effects such as capital flows and the interest rate; this material is covered in the chapter. You may wish to supplement the assignment with current articles about the value of the dollar and views as to whether the U.S. government should “manage” the dollar more than it does at present. Other points that could be addressed include how long the long run really is and whether the short-run effects may swamp the long run. Stone’s section in microeconomics about the different definitions of time in economics is very useful.
Web-Based Exercise
This example can be used as a small group exercise or as an individual exercise. The exercise provides an opportunity for students to apply the material in the chapter about purchasing power parity and the Big Mac Index to get a feel for forecasting exchange rates. The exercise asks students to look at the Big Mac Index data from some previous period(s) and see if the currencies noted as “overvalued” subsequently depreciated and if those noted as “undervalued” subsequently appreciated.
You can change how extensive this assignment is by adding more past periods of
time or supplementing the Big Mac data with articles about various currencies
explaining the factors affecting them.
Students may also be intrigued by The Economist’s “lattenomics” that uses
Starbucks coffee instead of burgers. A video clip and explanation are among the
resources on the site at http://www.economist.com/markets/Bigmac/Index.cfm.
PPP and the Big Mac
As described in the text, the Big Mac Index published by The Economist has always
been meant to be a humorous and intuitive way to explain purchasing power parity.
However, as simple as it is, the Big Mac Index has been pretty good at predicting the future course of some currencies. Visit the Web site for the Big Mac Index at
http://www.economist.com/markets/Bigmac/Index.cfm and answer the following:
Collect data to answer the following:
1) Pick three currencies that were listed as overvalued at the time and three
that were listed as undervalued. Have those currencies subsequently moved
in the indicated directions?
2) Describe the limitations of the Big Mac Index.

Tips from a Colleague
The most challenging part of this chapter is the material on the current and capital accounts. Students are likely to understand that if we import more than we export we have a trade deficit, but the logic of why this results in a capital account surplus is likely to elude them. You might consider a simple intuitive illustration of swapping goods. Offer to trade an inexpensive stick pen for a student’s hat or other item which has an obviously higher value. Explain that such a direct swap of goods would be similar to imports and exports. When the student suggests that the goods being traded are not equal in value, offer different amounts of money (hypothetically) to make up the difference. Explain that the willingness of someone to take U.S. money to make up the difference is analogous to the increased holdings of U.S. assets by foreigners that make up the capital account.

Ch. 26 References

JFK Confers with Advisors on Gold & the Balance of Payments

At the end of World War II, the US became the mainstay of the Bretton Woods international monetary system. Under this system, the US dollar was the key currency and interchangeable into gold at $35 per ounce. Until the late 1950s, the dollar tended to be undervalued (dollar shortage). But after that time, there was a dollar surplus and a resulting drain on the US gold supply. The standard remedy would have been a tight monetary policy and austerity. But the Kennedy administration was elected in 1960 on a platform of economic expansion. There are hours of White House tapes of Kennedy and his advisors fretting over the dollar/gold situation. This clip contains illustrative excerpt from April 18, 1963. At the meeting are JFK, Treasury Secretary C. Douglas Dillon, George Ball, and Robert V. Roosa. Kennedy can be heard responding. The speaker presenting the report is probably Dillon.

Email HW to gmsmith@shanahan.org

1. Be sure to review Chapters 20-26 (we will have Tests on this material as well, TBA). Some students have asked to be tested as close as possible after covering the material.

2. Here is a true story. On a flight from the United States to France the cabin crew announced that wine, beer, etc. could be purchased for either 5 U.S. dollars or 4 euros. Who got the better deal, the people paying in U.S. currency or the people paying in euros? This is a very simple example of purchasing power parity.
Play a game of name that currency. Pick a country (or a currency) and see if anyone can identify the currency (or country). Illustrate the various currencies of the world by visiting a Web site such as http://www.x-rates.com/. Among other things, this site provides you with the opportunity to calculate values in different currencies and generate graphs of currencies relative to each other over different periods of time.

3. As review for HW, typical questions that you may encounter on the actual AP Economics Macro Test are included daily:

Review Questions (Princeton):
27. Having a fractional reserve banking system means that

a) no single loan can be larger than 20 percent of the bank's holdings
b) the central bank reserves the right to audit any bank at any time
c) the central bank holds a certain fraction of GDP on reserve at all times
d) the central bank must approve loans over $1 million
e) a bank cannot lend out all of its deposits
28. If technology makes production less expensive and at the same time exports decrease, which of the following will result with certainty?

a) Real GDP will increase
b) Real GDP will decrease
c) The price level will increase
d) The price level will decrease
e) Real output will remain the same

29. Which of the following must exist to allow for mutual benefit from specialization and trade between two countries?

a) Comparative advantage in the production of a good or service
b) Absolute advantage in the production of a good or service
c) Increasing marginal returns in production
d) Absolute and comparative advantage in the production of a good or service
e) Absolute advantage and increasing marginal returns in production