international monetary system Flashcards
what is LIBOR?
is a benchmark interest rate that banks use to lend money to each other in the international financial market. erves as a reference point for setting interest rates on various financial products, such as loans, mortgages, and derivatives
what are eurocurrencies?
they are currencies that are deposited and used in banks outside their country of origin.
what are the two purposes that eurocurrency markets serve?
- money market device for excess corporate liqduity
- source of short term bank loans
what is the gold standard?
fixed exchange rate, like a rule for money where each unit of a country’s currency (like a dollar or a pound) was directly tied to a specific amount of gold, lasted until world war 1
how did the gold standard impact trade?
the buying and selling of products and services between countries are having a more significant influence on international financial activities than things like foreign investments or currency exchange.
how did the gold standard impact economies?
increased world trade with limited capital flows
the inter war years and world war 2?
during this period, currencies were flexible, speculators could profit by betting on currency changes, and the U.S. dollar became the most trusted currency when it came to exchanging for gold during and after World War II, fixed-> floating.
how did the inter war years impact trade?
increased barriers to trade and capital flows
how did the inter war years impact economies?
more protectiionsim and nationalism
allied powers met in Bretton woods and did what?
created a post war international monetary sysstem
what was created in 1944?
world bank, IMF, to ensure that International business and economies during downturns were minimized as much as possible (help out emerging economies)
what was decided in 1944 about devaluation? (deliebareluy lowering its currency)
- ## They agreed that countries couldn’t just lower the value of their currency a lot to make their exports cheaper (a competitive trade move). If they wanted to lower it a little (up to 10%), they needed permission from the IMF
what happened in 1944 relative to currency values?
Each country fixed its currency’s value compared to the U.S. dollar and figured out how much gold it should be worth.
what happened in 1944 relative to maintaining values?
Countries agreed to try to keep their currency values close to what they said they were worth. They did this by buying or selling their own currency or gold if it got too far from its set value
what is the IMF?
was the key institution in the new international
monetary system
why was the IMF. created?
Help countries defend their currencies against cyclical,
seasonal, or random occurrences
assets countries having trade problems but hav e to take steps to correct these problems
what is SDR (IMF)?
The IMF created something called the Special Drawing Right (SDR), which is like a special type of currency used by the IMF and other international organizations
what made president Nixon make the US dollar not tied to gold?
The U.S. dollar was at the center of this system. But the U.S. needed to send a lot of its dollars overseas to meet the needs of investors and cover its budget deficits. This made people worried that the U.S. might not have enough gold to back up all those dollars.
how did Nixon deal with the lack of confidence?
President Nixon decided to stop promising to exchange U.S. dollars for gold
With the U.S. dollar no longer tied to gold, what hapepend/
there were floating exchange rates, exchange rates could go up and down freely
what happened to the dollar?
About a year and a half later, the value of the U.S. dollar started dropping, and it lost about 10% of its value, end of fixed rates
what is the floating era?
Exchange rates became much more volatile and less predictable
than they were during the “fixed” period
what Is the emerging era?
Growth in emerging market economies and currencies
what are the three attributes for the impossible trinity?
- Exchange rate stability
-Full financial integration - Monetary independence
it’s really hard for a currency to have all three of these attributes at the same time
what is exchange rate stability?
Exchange rate stability means a currency stays at the same value when you exchange it for other currencies
what is full financial integration?
Think of this like a big bank where everyone uses the same account and can move money freely. Full financial integration means that people from different places can easily borrow, lend, and invest money with each other, like they’re all part of the same financial system. This is about letting money flow easily in and out of your country without many restrictions
what is monetary indepdnece?
Picture a person who can make decisions about their money without anyone else telling them what to do. Monetary independence means a country can control its own money, interest rates, and policies without being influenced too much by other countries or a larger organization. This is the ability to control your own money supply, set interest rates, and manage your economy without being too influenced by other countries
if you use exchange rate stability , what do you give up?
an independent monetary policy, or allowing the free movement of capital in and out of the country
if you use monetary indepdnce, what do you give uP?
a stable exchange rate, or allowing free movement of capital in out of country
