Vecka 3 sammanfattningar del 4 Flashcards
What powerful automatic mechanism for ensuring external balance did The gold standard system contain?
the price-specie-flow mechanism. The flows of gold accompanying deficits and surpluses caused price changes that reduced current account imbalances and therefore tended to return all countries to external balance.
When did the gold standard got suspended?
With the eruption of World War I in 1914
What did The architects of the International Monetary Fund (IMF) hoped to do?
Design a fixed exchange rate system that would encourage growth in international trade while making the demands of external balance sufficiently flexible that they could be met without sacrificing internal balance. And all countries pegged their currency against the US dollar.
What is a key weakness in the currency system?
To reach internal and external balance at the same time, expenditure-switching as well as expenditure-changing policies were needed. But the possibility of expenditure- switching policies (exchange rate changes) could give rise to speculative financial flows that would undermine fixed exchange rates.
What problem did the US faced during the Bretton woods system?
the confidence problem, which would arise as foreign official dollar holdings inevitably grew to exceed U.S. gold holdings.
What are four main arguments in favor of floating exchange rates?
- It would give national macroeconomic policy makers greater autonomy in managing their economies.
- Floating rates would remove the asymmetries of the Bretton Woods arrangements.
- Floating exchange rates would quickly eliminate the “fundamental disequilibriums” that had led to parity changes and speculative attacks under fixed rates.
- these same exchange rate movements would prevent large, persistent departures from external balance.
What are the two main reasons for the European Union countries for favoring mutually fixed exchange rates?
- They believe monetary cooperation will give them a heavier weight in international economic negotiations,
- they view fixed exchange rates as a complement to EU initiatives aimed at building a common European market.
When did Eu started EMU (taking the euro)?
On January 1, 1999,
What does The theory of optimum currency areas imply?
That countries will wish to join fixed exchange rate areas closely linked to their own economies through trade and factor mobility.
What determine A country’s decision to join an exchange rate area?
The difference between the monetary efficiency gain from joining and the economic stability loss from joining. The GG-LL diagram relates both of these factors to the degree of economic integration between the joining country and the larger, fixed exchange rate zone. Only when economic integration passes a critical level is it beneficial to join.
When did the Euro develop?
1999
What is An optimal currency area?
an area where the gains from having a common currency for fixed exchange rates are greater than the losses from having it.
Where does Economic integration happens?
- Product markets, trade of goods and services.
- Factor markets, how mobile is capital and labour.
What decides if it is an optimal currency area?
It depends on how well integrated countries/regions in the area are with eachother.
What does A common currency give?
monetary efficiency gains but a loss of economic stability.
