International monetary arrangements Flashcards
What are the 5 International monetary arrangement periods?
Gold standard Inter-war period Bretton Woods system Transition years Post Bretton-Woods
The gold standard was a … based system
Metal-based system
Under the gold standard, currencies maintain a fixed price relative to…
Gold
A gold standard is a … … standard
A gold standard is a commodity money standard.
A … … standard means each currency is…
Commodity money … worth a fixed amount of gold and can be exchanged for gold at any time
Why is a gold standard difficult to maintain?
A gold standard is difficult to maintain because it requires a commitment from participating countries that issues currency to be willing to buy and sell gold to anyone at the fixed price
For what reasons was gold used as the commodity monetary standard?
- Homogenous
- Easily portable/storable
- Based on a commodity with relatively fixed supply (Costly to increase supply)
If $ and £ are both fixed to gold, then the exchange rate of £ to $ is also…
Fixed
What are two factors that may still affect prices in the short term, under the gold standard?
- Gold output
- Economic growth
The supply of … is restricted by the supply of …
Money - Gold
A fixed supply of gold leads to long run…
Price stability
Fluctuations between 1880-1910 in the US was due to the fact there was no…
Central bank
What ended the gold standard?
The first world war
Under BW, there was a need for a system that fixed currencies relative to … but did not fix each currency in terms of …
Each other - gold
Each country fixed it’s value of currency in terms of an … currency, namely the …
Anchor Dollar
Why was the anchor currency ($) tied to gold in an indirect way?
To make sure that the anchor currency did not move
What is the principal tool for internal balance?
Fiscal policy
What are the principal tools for external balance?
IMF borrowing
Restrictions on financial asset flows
Infrequent exchange rate changes
What is the benefit of a devaluation and what it can achieve?
The benefit of a devaluation is it can allow a country to free itself from both an internal and external imbalance
What can cause greater internal/external imbalances?
Greater internal/external imbalances can be caused by speculators betting on swings in the exchange rate
What does monetary policy autonomy mean and how is it a FR benefit?
Monetary policy autonomy means that a government is more free to control and assist with regards to domestic policy, because they don’t have to commit to using their reserves to fix the exchange rate.
How does domestic inflation affect a country’s currency value?
Domestic inflation reduces the value of a country’s currency both domestically and abroad
How can flexible exchange rates prevent speculation?
Flexible rates can prevent speculation because they can prevent scenarios in which speculators bet on potential systematic devaluations
What is the benefit and drawback of a standard peg?
The benefit of a standard peg is that it provides for more stability with foreign exchange values and therefore within the domestic values too. A drawback, however, is the cost of having to obtain and maintain sufficient foreign reserve currency in order to keep the rate pegged.
What is an optimum currency area?
An optimum currency area is an area within which economic benefits can be maximised by fixing the exchange rates within it.
What is a necessary criterion for an optimum currency area?
A necessary criterion for an optimum currency area is that there must be the ability for costless transfer of the factors of production within the area.
