CH 10 - The Economics Of The International Monetary System

Question 1

Exchange-rate system

Answer 1

A set of rules that together specify the amount by which currencies can appreciate and depreciate in the foreign exchange market

Question 2

Fixed-but-adjustable exchange rate system

Answer 2

A system in which establish a central or official rate for their currency against some standard, as in a fixed exchange-rate system, but are also allowed to change the official rate occasionally, usually under a set of well-defined circumstances

Question 3

Fixed exchange rate system

Answer 3

A system in which governments establish a central or official rate for their currency, usually expressed in terms of some standard

Question 4

Foreign exchange market

Answer 4

The market in which national currencies are traded

Question 5

Foreign exchange reserves

Answer 5

Government holdings of other countries’ currency

Question 6

Floating exchange rate system

Answer 6

A system in which governments do not establish a central or official rate for their currency and are under no obligation to engage in foreign exchange market intervention to influence the value of their currency

Question 7

Managed float

Answer 7

A form of floating exchange rate system in which government occasionally intervene in foreign exchange markets to try to influence the value of their currency

Question 8

Balance of payments

Answer 8

An accounting device that records a country’s international transactions

Question 9

Balance-of-payments adjustments

Answer 9

The use of government policies to correct a balance-of-payments deficit or surplus

Question 10

Capital account

Answer 10

One of the two principal components of the balance of payments, it records all financial flows into and out of particular country

Question 11

Current account

Answer 11

It records all payments between the country and the rest of the world in connection with goods, services, royalties, etc.

Question 12

Stabilization fund

Answer 12

The credit mechanism controlled by the IMF created by contributions from IMF member governments

Question 13

Fundamental disequilibrium

Answer 13

The balance of payments conditions that must pertain in order for the government to alter its central parity against gold in the Bretton Woods system

Question 14

Exchange restrictions

Answer 14

Government regulations controlling the private use of foreign exchange

Question 15

Conditionality

Answer 15

The terms governing transactions between the IMF and members government

Question 16

IMF

Answer 16

Initially charged with helping governments finance and ultimately eliminate balance-of-payments deficits in order to maintain stable exchange rates

Question 17

Dollar overhang

Answer 17

Outstanding claims on US monetary gold were greater than the stock of monetary gold the US held

Question 18

Speculative attack

Answer 18

A spate of very large sales of one country’s currency by private financial institutions, sparked by the belief that the government is about to devalue the currency

Question 19

Bretton Woods System

Answer 19

Was based on fixed-but-adjustable exchange rates in an attempt to provide stable international monetary system and at the same time allow governments to use monetary policy to manage the domestic economy