Lesson 10

Question 1

The Bretton Woods System (1944-1973)

Answer 1

• Fixed exchange rates
• Controls on international flows of capital

The controls on international flows of capital allowed some degree of monetary policy autonomy.

Autonomy - ability to allow interest rates to differ from global interest rates without the large inflows/outflows of financial capital

Question 2

The International Gold Standard (1870-1914)

Answer 2

• Fixed exchange rates
• All currencies were linked to gold with no restrictions on the import/export of Gold and freedom of international financial flows
• Individual countries had no monetary autonomy.
• could not use monetary policy to achieve domestic policy goals.

Question 3

The post-Bretton Woods era (1973-present)

Answer 3

• Flexible exchange rates
• Free movement of financial capital
• Exchange rate stability is sacrificed

Question 4

Similarities between BWS and IGS

Answer 4

• Both fixed exchange rates
• Both systems used gold as a “monetary anchor”
  IGS - all currencies tied to gold through an official price of gold which was backed by each countries CB
• Bretton Woods was better at internal balance (GDP was more stable and unemployment was lower)

Question 5

IGS and BWS Methods to Fix Exchange Rates

Answer 5

IGS - each country fixed the value of its currency in terms of Gold. (specifying the number of units of currency equal to a weight of gold)

BWS - each country fixed the value of its currency to the US dollar. US dollars were the reserve currency of the system.

Question 6

Monetary Anchor Differences

Answer 6

“Monetary anchor” differences:
IGS - all currencies tied to gold through an official price of gold which was backed by each countries CB
BWS - only the US dollar was tied to gold ($35/ounce)

Question 7

IGS Symmetry vs BWS Asymmetry

Answer 7

IGS - Symmetry

i) Each country fixed the exchange rate between its currency and gold
ii) Each country faced the commitment to trade it and all countries shared equally in the process of maintaining equilibrium

BWS - Asymmetry

i) US occupied a special position and never had to intervene in the FX market
ii) the US was the only country able to use monetary policy (and its monetary policy then influenced everyone elses)

Question 8

International Gold Standard (External/Internal Balance)

Answer 8

External Balance -
Price-specie-flow
Rules of the Game

Internal Balance -
No mechanisms

Question 9

Bretton Woods System (External/Internal Balance)

Answer 9

External -
IMF could approve a revaluation or devaluation
IMF was a lender of last resort

Internal -
Capital controls were permitted

Question 10

Internal Balance

Answer 10

Y = A + CA

Question 11

External Balance

Answer 11

When CA is equal to a given level, “K”

Question 12

The gold standard contributed to short-run stability of prices and output.

Answer 12

False, long run stability but short run instability

Question 13

Under the price-specie-flow mechanism a country with a balance of payments surplus would see that surplus eliminated through

Answer 13

an expansion in the domestic money supply, rising domestic prices, and a fall in the real exchange rate which reduces the current account balance

Question 14

Under the Bretton Woods system a country which found itself in a situation of recession or underemployment and an excessive current account deficit could

Answer 14

use contractionary fiscal policy alone to move closer to external balance but at the cost of moving further away from internal balance

Question 15

Under the gold standard’s rules of the game a central bank of a country with a large balance of payments deficit would lower interest rates.

Answer 15

False.

Question 16

Under the Bretton Woods system, a country which is in internal balance (full-employment) but which has an excessive current account deficit can achieve simultaneous internal and external balance through a combination of devaluation (an increase in the exchange rate) and fiscal expansion (an increase in government purchases).

Answer 16

False