International monetary arrangements

Question 1

What are the 5 International monetary arrangement periods?

Answer 1

Gold standard
Inter-war period
Bretton Woods system
Transition years 
Post Bretton-Woods

Question 2

The gold standard was a … based system

Answer 2

Metal-based system

Question 3

Under the gold standard, currencies maintain a fixed price relative to…

Answer 3

Gold

Question 4

A gold standard is a … … standard

Answer 4

A gold standard is a commodity money standard.

Question 5

A … … standard means each currency is…

Answer 5

Commodity money … worth a fixed amount of gold and can be exchanged for gold at any time

Question 6

Why is a gold standard difficult to maintain?

Answer 6

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

Question 7

For what reasons was gold used as the commodity monetary standard?

Answer 7

• Homogenous
• Easily portable/storable
• Based on a commodity with relatively fixed supply (Costly to increase supply)

Question 8

If $ and £ are both fixed to gold, then the exchange rate of £ to $ is also…

Answer 8

Fixed

Question 9

What are two factors that may still affect prices in the short term, under the gold standard?

Answer 9

• Gold output

- Economic growth

Question 10

The supply of … is restricted by the supply of …

Answer 10

Money - Gold

Question 11

A fixed supply of gold leads to long run…

Answer 11

Price stability

Question 12

Fluctuations between 1880-1910 in the US was due to the fact there was no…

Answer 12

Central bank

Question 13

What ended the gold standard?

Answer 13

The first world war

Question 14

Under BW, there was a need for a system that fixed currencies relative to … but did not fix each currency in terms of …

Answer 14

Each other - gold

Question 15

Each country fixed it’s value of currency in terms of an … currency, namely the …

Answer 15

Anchor Dollar

Question 16

Why was the anchor currency ($) tied to gold in an indirect way?

Answer 16

To make sure that the anchor currency did not move

Question 17

What is the principal tool for internal balance?

Answer 17

Fiscal policy

Question 18

What are the principal tools for external balance?

Answer 18

IMF borrowing
Restrictions on financial asset flows
Infrequent exchange rate changes

Question 19

What is the benefit of a devaluation and what it can achieve?

Answer 19

The benefit of a devaluation is it can allow a country to free itself from both an internal and external imbalance

Question 20

What can cause greater internal/external imbalances?

Answer 20

Greater internal/external imbalances can be caused by speculators betting on swings in the exchange rate

Question 21

What does monetary policy autonomy mean and how is it a FR benefit?

Answer 21

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.

Question 22

How does domestic inflation affect a country’s currency value?

Answer 22

Domestic inflation reduces the value of a country’s currency both domestically and abroad

Question 23

How can flexible exchange rates prevent speculation?

Answer 23

Flexible rates can prevent speculation because they can prevent scenarios in which speculators bet on potential systematic devaluations

Question 24

What is the benefit and drawback of a standard peg?

Answer 24

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.

Question 25

What is an optimum currency area?

Answer 25

An optimum currency area is an area within which economic benefits can be maximised by fixing the exchange rates within it.

Question 26

What is a necessary criterion for an optimum currency area?

Answer 26

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.