Chapter 33 — Key Takeaways

Balance of payments

Current account (trade in goods/services + net income + transfers) + Capital account (financial flows) = 0. U.S. trade deficit (~$900B/year) is exactly offset by capital inflows.

Exchange rates

Determined by supply and demand for currencies. Appreciation: dollar stronger (hurts exports, helps imports). Depreciation: dollar weaker (helps exports, hurts imports).

The impossible trinity

A country can have only two of: (1) fixed exchange rate, (2) free capital mobility, (3) independent monetary policy. Most rich countries choose free capital + monetary independence (floating rates).

Currency crises

When capital flight exhausts reserves and a fixed rate collapses. Asian crisis (1997): pegs broke, currencies collapsed, deep recessions. Eurozone crisis (2010–13): single currency without fiscal union → forced austerity on weaker members.

The dollar as reserve currency

Benefits: cheap borrowing, geopolitical leverage. Costs: overvalued dollar hurts exporters, persistent trade deficit.

PART VII COMPLETE.