chapter 12- the int monetary system

Question 1

world bank

Answer 1

investing in developing economies and eliminating poverty
- prevent domino effect (is Mexico suffers, could affect US, US down, Canada down then China etc).

Question 2

IMF- International monetary funds

Answer 2

monitors exchange rates, stabilizes global monetary systems and global monetary cooperation
- low cost loans
- comes with restrictions with austerity measures
- prevent domino effect

Question 3

floating rates

Answer 3

allows for:
1.) monetary policy autonomy: a country’s ability to expand and contract money supply
2.) automatic trade balance adjustments
3.) help countries recover from financial crisis
- US dollar floats against euro, the yen etc
- deemed easier to recover
- we float against each other, currency always changing
- trade deficit devalues currency
- trade surplus currency appreciate

Question 3

fixed exchange rates

Answer 3

countries fix their currencies against each other at some mutually agreed on exchange rate
- speculation causes uncertainty (currency speculation is detrimental)
- lack of connection between the trade balance and exchange rates
- less common
- does it bc currency uncertainty

Question 4

floating exchange rate system

Answer 4

exists when a country allows the foreign exchange market to determine the relative value of a currency
- their values are determining by market forces, gov intervention, and fluctuate day to day

Question 5

pegged exchange rate system

Answer 5

• generally for developing countries
• Vietnam currency pegged to US currency meaning US currency goes up, so does dong.
• stabilize currency for that country

Question 6

currency boards

Answer 6

monetary authority and commitment from the country to convert its domestic currency on the demand into another currency at a fixed exchange rate
- hold currency in reserve
- focused on currency stability

Question 7

debate surrounding role of IMF

Answer 7

no county wants a global entity intervening into their monetary policy

Question 8

debate surrounding role of the IMF

Answer 8

under erious debate, critits say IMF imposes innaaporopriate conditions on developing nations (ccuts in public spending, higher interets rates, tight monetary plocys))

Question 9

One size fits all approach (debate surrounding role of the IMF)

Answer 9

macro economic policy that may be inappropriate for many countries

Question 10

moral hazard (debate surrounding role of the IMF)

Answer 10

people behave recklessly bc they know they will be saved if things go wrong

Question 11

lack of accountability (debate surrounding role of the IMF)

Answer 11

has become too powerful or an institution that lacks any real mechanism for accountability

Question 12

global monetary systems

Answer 12

help international companies to reduce their economic exposure around this fluctuating currency

Question 13

implications of the global monetary systems

Answer 13

• reduce economic exposure
• build strategic flexibility
• aware of IMF policies

Question 14

reduce economic exposure

Answer 14

disperse production around the globe- allows to hedge currency fluctuations

Question 15

build strategic felxibility

Answer 15

shift suppliers in response to exchange rates

Question 16

aware of IMF policies

Answer 16

need to follow IMF policies and see whaat countries are benefiting

Question 17

implications to business management

Answer 17

• currency crisis
• banking crisis
• foreign debt crisis

Question 18

currency crisis

Answer 18

speculative attack on the exchange value of a currency in a sharp depreciation in the value of the currency (brazil 2002)

Question 19

banking crisis

Answer 19

loss of confidence in the banking system that leads to a run on banks
banks run out of money and money in banks wouldn’t be protected (during great depression)

Question 20

foreign debt crisis

Answer 20

when a country cannot service its foreign debt obligations (Greece, Ireland, Portugal in 2010)

Question 21

T/F: implementing a fixed exchange regime increases the price inflation in counties

Answer 21

False

Question 22

T/F: the IMFs original function was to provide a pool of money from which members could borrow in the short term

Answer 22

True