International Monetary System

Question 1

What is the function of money

Answer 1

Medium of exchange
Store value
Unit of account

Question 2

What are the forms of money

Answer 2

Fiat currencies = coins, paper, electronic money
Central bank money = cash and foreign currencies and gold
Commercial bank money = private money = digital deposit

Question 3

What are the types of exchange rate regime

Answer 3

Fixed
- hard peg
*dollarization, monetary union, currency board
- soft peg
*crawling peg, horizontal peg

Floating/flexible
- independent float
- managed float

Non-convertible

Question 4

What do fixed exchange rates do?

Answer 4

Provides stability in international prices
Monetary discipline
Lower inflation
Limits speculation
Reduced uncertainty
Risk of over evaluation
Vulnerable to shocks

Question 5

What do floating/flexible exchange rates do?

Answer 5

Monetary policy autonomy
Automatic adjustment of trade shocks
Does not require large quantities of foreign currency reserves
Risk of exchange rate volatility
Risk of imported inflation

Question 6

What is the Canadian monetary policy

Answer 6

Flexible/floating exchange rate
Inflation targeting approach
Overnight interest rate

Question 7

How do interest rate affect currency value

Answer 7

^ interest rates -> ^ demand of currency -> ^ currency value -> ^ prices -> down demand

Question 8

What are the different eras of the international monetary system?

Answer 8

Gold standard
Interwar
Bretton woods
Recent period

Question 9

What defined gold standard era

Answer 9

Countries set par value for their currency in terms of gold (gold standard)
Currency par value was based on purchasing power parity
Exchange rates were fixed by international agreements

Question 10

What were the advantages of the gold standard

Answer 10

Reduces risk in exchange rates because it maintained a fixed exchange rate between currencies
Imposes strict monetary discipline on all countries that participate in that system, controlling inflation
Can help correct a nation’s long-term trade imbalance

Question 11

What defined the interwar era

Answer 11

Currencies were allowed to fluctuate over a fairly wide range in terms of gold and each other
Increasing fluctuations Ain currency values became realized as speculator sold short weak currencies
After ww2 the US dollar was the only major trading currency that continued to be convertible

Question 12

What was the bretton woods agreement

Answer 12

Created the post-war international monetary system
The agreement established the US dollar based monetary system
Created the imf and world bank
All countries fixed their currencies in terms of gold but were not required to exchange their currencies for gold
US dollar remained convertible into gold at 35$/oz

Question 13

What are the functions of the IMF

Answer 13

Promote international monetary cooperation
Promote exchange rate stability
Improve availability of resources to members experiencing balance of payment difficulties
Facilitate international trade
Assist in the establishment of a multilateral system of payments
Surveillance

Question 14

What are the roles of the world bank

Answer 14

Fund post-war reconstruction
Overshadowed by the Marshall plan
Since then supported general economic development

Question 15

What created the collapse of the fixed exchange rate system

Answer 15

Widely diverging monetary and fiscal policies
Different rates of inflation
Various currency shocks weakened the system
Consistent and growing balance of payment deficit
Lack of confidence in the ability of the us to meet its commitment to covert dollars to gold

Question 16

What are the common causes of currency crises

Answer 16

Fiscal policies
High inflation
Widening current account deficit
Excessive expansion of domestic borrowing
Asset price inflation
Reversal of capital inflow
Speculation

Question 17

What is a digital currency

Answer 17

Monetary value that is stored in an electronic device including computer, cloud tablet, mobile phone

Question 18

What are different types of digital currencies

Answer 18

Digital assets
Cryptography
Smart contracts
Distributed ledger technology/ blockchain
Tokenization
Nonfungible token

Question 19

What are some factors influencing the growth of digital currency?

Answer 19

Digital technology
E-commerce
E-payments
Advancement of technology
COVID-19

Question 20

What are the types of digital currencies

Answer 20

Centralized
- central bank digital currency
- stable coin

Decentralized
- cryptocurrency
- stable coin

Question 21

What is centralized digital currency

Answer 21

Often managed by a central issuer that assumes e-money as its liability
Generally accepted by wide range of people and institutions

Question 22

What are different types of centralized money

Answer 22

Mobile money
Computer game money
Big-tech credit
Central bank digital currencies

Question 23

What are decentralized digital currencies?

Answer 23

Based on a dispersed network of users with no-one user recognizing e-money as its liability
Peer-to-peer computer network using blockchain technology
Cryptographic tools to update and track records of a common ledger among members

Question 24

Does bitcoin qualify as money

Answer 24

No because
Not yet accepted as a medium of exchange
Not yet a unit of account
Store of value is too volatile
No intrinsic vamue

Question 25

What are some disadvantages of bitcoin

Answer 25

Not backed by underlying asset of financial institution
Not environmental friendly
Cyber criminals
Cannot be used to overcome a financial crisis

Question 26

What are stable coins

Answer 26

Crypto tokens that serve as digital replications of those assets
Use decentralized blockchain technology as their trading payment infrastructure
Potential to disrupt the current financial system
Issued by private platform, often combine the role of money and data gathering/social networking

Question 27

What are the types of decentralized stable coins

Answer 27

Elasticity supply chain
Collateralized debt positions
Self-collateralized stable coins
Bond redemption coins
Collateralized redemption coins

Question 28

What are advantages and disadvantages of stable coins in the international monetary system

Answer 28

Advantages
- digitizations of assets
- fractionalization of assets
- traceability of assets
- lower costs for international payments
- less time to settle transactions
- stimulates improvement of trad financial system

Disadvantages
- requires new regulations
- Monetary policy limitation
- less trust
- higher cyber crimes risks
- fluctuates with underlying assets

Question 29

What are the implications of digital currencies for international business

Answer 29

Lead to change in demand for cash
Affect balance sheet of central banks
Affect bank of canadas ability to influence monetary policy and financial stability
Affect nation’s payment clearing and settle to infrastructure
Can accelerate the transfer of payments across countries and reduce the cost of international transactions
Lack of centralized authority can increase risk of fraud

Question 30

What are the characteristics of the central bank digital currency

Answer 30

Digital money issued by the central bank
Pegged to fiat currency
Serves the unbanked
Easily accessible everywhere on mobile phones
Provides financial stability
Less cost compared to printing coins and paper notes
Reduce cross-border payment cost
Can reduce delay in cross-border payments