Globalisation, MNCs, International Monetary System

Question 1

Bimetallism (Before 1875)

Answer 1

A “double standard” in the sense that both gold and silver were used as money.
Gresham’s Law : the least valuable metal is the one that tends to circulate

Question 2

Gold standard (1875~1914)

Answer 2

Highly stable exchange rates provided an environment that was conducive to international trade and investment.
Misalignment of exchange rates and international imbalances of payment were automatically corrected by the price-specie-flow mechanism.

Supply restricted
pursue national objective, abandon gold standard

Question 3

Interwar period (1914~1944)

Answer 3

no system since no one trust each other

Question 4

Bretton Wood System (1945~1972)

Answer 4

US dollar was pegged to gold and other currencies were pegged to the U.S. dollar.

Question 5

Flexible exchange rate regime (from 1973)

Answer 5

Easier external adjustments.
National policy autonomy.
BUT
Exchange rate uncertainty may hamper international trade.
No safeguards to prevent crises.

Question 6

Impact of Euro

Answer 6

political integration of Europe, together with $ major currencies

Question 7

Benefits of euro

Answer 7

lower transaction costs, eliminate ex rate risk
enhance competition
greater price stability (low inflation)

Question 8

Costs of euro

Answer 8

loss of independent monetary policy
loss of ex rate flexibility
tight fiscal rules
but if they have similar business cycle and face similar environments costs won’t be large

Question 9

1. A fixed exchange rate.
2. Free international flows of capital.
3. Independent monetary policy.

Answer 9

only two out of three can be achieved