chapter 11

Question 1

international monetary system

Answer 1

refers to the institutional arrangements that govern exchange rates.

Question 2

floating exchange rate

Answer 2

when the foreign exchange market determines the relative value of a currency.

Question 3

pegged exchange rate

Answer 3

means the value of the currency is fixed relative to a reference currency and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate. this often happens in developing nations, eg. to the euro or dollar.

Question 4

managed float system/dirty-float system

Answer 4

when a country tries to hold the value of their currency within some range against an important reference currency such as the US dollar or a “basket” of currencies. it is a float because, in theory, the currency is determined by market forces, but managed because the central bank will intervene in the foreign exchange market to try to maintain the value of its currency if it depreciates too rapidly against an important reference currency.

Question 5

fixed exchange rate

Answer 5

when the values of a set of currencies are fixed against each other at some mutually agreed-on exchange rate.

Question 6

gold standard

Answer 6

pegging currencies to gold and guaranteeing convertibility. by 1880, most major trading nations had adopted it. it was easy to determine the value of any currency in units of any other currency (exchange rate), given the common gold standard.

Question 7

gold par value

Answer 7

the amount of a currency needed to purchase one ounce of gold.

Question 8

balance-of-trade equilibrium

Answer 8

when the income the residents of a country earn from exports is equal to the money its residents pay to other countries for imports. this means the current account of its balance of payments is in balance.

Question 9

Bretton Woods agreement

Answer 9

aimed to avoid a repetition of the chaos of the 1930s through a combination of discipline and flexibility. the IMF was the main custodian on this agreement. it established a system of fixed exchange rates, which worked well until late 1960s. it collapsed in 1973, after which a managed-float system was established. the dollar was the only currency that could be converted into gold and served as a reference point. when it devalued, havoc occurred.

Question 10

World Bank

Answer 10

the initial mission was to help finance the building of Europe’s economy by providing low-interest loans. however, the Marshall Plan overshadowed the World Bank. so, it began turning to development and lending money to third-world nations.

Question 11

Marshall Plan

Answer 11

the US lent money directly to European nations to help them rebuild.

Question 12

Jamaica agreement

Answer 12

the IMF members met in January 1976 follow the collapse of the fixed exchange rate system. they formalised the floating exchange rate system and agreed to the rules for the IMF that are still in place today.

Question 13

total annual IMF quotas

Answer 13

the amount member countries contribute to the IMF.

Question 14

oil crisis 1971

Answer 14

when the OPEC quadrupled the price of oil. the harmful effect of this on the US inflation rate and trade position resulted in a further decline in the value of the dollar.

Question 15

rise in US inflation rate 1977-1978

Answer 15

due to a loss of confidence in the dollar.

Question 16

oil crisis 1979

Answer 16

when the OPEC once again doubled the price.

Question 17

rise of dollar 1980-1985

Answer 17

despite a deteriorating balance-of-payments picture.

Question 18

1997 Asian currency crisis

Answer 18

when Asian currencies of several countries, including South Korea, Indonesia, Malaysia, and Thailand lost between 50% and 80% of their value against the US dollar in a few months.

Question 19

currency board

Answer 19

when a country commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. to make this commitment credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100% of the domestic currency issued.

Question 20

IMF

Answer 20

its activities have expanded because periodic financial crises have continued to hit many economies in the post-Bretton Woods era. the IMF has repeatedly lent money to nations experiencing financial crises, requesting in return that the governments enact certain macroeconomic policies.

Question 21

currency crisis

Answer 21

occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate. this happened in Brazil in 2002, and the IMF stepped in to help stabilise the value of the Brazilian currency on foreign exchange markets by lending it foreign currency.

Question 22

banking crisis

Answer 22

refers to a loss of confidence in the banking system, that leads to a bank run, as individuals and companies withdraw their deposits. this happened in Iceland in 2008.

Question 23

foreign debt crisis

Answer 23

a situation in which a country cannot service its foreign debt obligations, whether private-sector or government debt. this happened in Greece, Ireland, and Portugal in 2010.