Origins of the IMF (finished)

Question 1

What was the UN monetary and financial conference?

Answer 1

Conference held in Bretton Woods, New Hampshire in 1944. The purpose was to rebuild the financial system after WW2.

Attended by 730 delegates from the 45 allied nations

The conference led to the creation of both the World bank and the IMF, and a plan to establish an International Trade Organisation

Question 2

Explain the Bretton Wood system of fixed exchange rates

Answer 2

All other members had to define the exchange value of their money in terms of gold or in terms of the US dollar, and they guaranteed the convertibility of their own currencies into dollars at a fixed exchange rate. Changes of the exchange rates (parity) could only be made with consent of the IMF. Member countries had to maintain their parity by buying and selling foreign currency, usually the US dollar.

One ounce of gold = 35$

Question 3

What was the advantage of the system of fixed exchange rates?

Answer 3

Currencies were kept stable and predictable → good for trade and investments

and with stability also comes encouragement for international trade

Question 4

Explain the collapse of the Bretton Woods system of fixed exchange rates?

Answer 4

With the growth of world trade, the demand for money for transaction purposes grew - there was simply not enough gold and dollars available

In 1971 the US stopped guaranteeing to convert dollars to gold

And in 1973 free exchanges rates were implemented, so now exchange rates are a result of market forces on capital markets

This was a loss of the IMF, which now lacked a large part of its original purpose.

Question 5

How did the purpose of the IMF change after the collapse of the Bretton Woods system?

Answer 5

The IMF moved towards
1. trying to influence the market forces and economic policies to influence and determine the exchange rates

2. evaluate member countries’ economic performances

Question 6

What was the original purpose of the IMF?

Answer 6

Prevention of another global depression through:

1. stimulating demand to ensure economic growth and stability
2. By improving restrictive monetary practices

Question 7

How did the IMF stimulate demand to ensure economic growth and stability?

Answer 7

Providing loans for “deficit spending”, pressure members to increase public spending or cutting taxes

Question 8

What is the expansionary economic policy?

Answer 8

when a government increase public expenditure, lower interest rates and lower taxes

this stimulates demand and the economy grows

Question 9

What is the contractionary economic policy

Answer 9

when a government decreases public spending. Increases interest rates and less demand

Less demand, leading to less economic growth

Question 10

What are the dangers with the expansionary economic policy?

Answer 10

Can lead to inflation and governments might not repay their debts in better times