Week 11: The global monetary system

Question 1

What are the types of exchange rate systems?

Answer 1

1. Floating Exchange Rate: Determined by market forces, no government intervention
2. Gold Standard: Currency backed by gold, fixed gold prices
3. Bretton Woods System: Post-WW2 system with USD pegged to gold, other currencies pegged to USD

Question 2

What are the rules in the gold standard?

Answer 2

• Money supply: gold + paper money backed by gold
• Official price of gold given in national currency, central banks were ready to buy and sell gold at this price level
• Free flow of gold in the world economy

Question 3

What is the external balance?

Answer 3

The equilibrium in a country’s international trade and financial transactions, crucial for maintaining a fixed exchange rate by ensuring that exports match imports to prevent significant outflows or inflows of gold reserves

Question 4

Which were the major changes in the political economy?

Answer 4

1. Introduction of electoral systems: General elections, the emergence of labor and socialist movements ⟶ Social costs can no longer be imposed on the population
2. Keynesian revolution in economics:
   - It challenged classical economic theories, advocating for active government intervention in the economy to stabilize output and employment, particularly through fiscal and monetary policies
   - This revolution profoundly influenced macroeconomic theory and policy, shaping the development of modern macroeconomics and the establishment of welfare-oriented economic policies in many countries

Question 5

What was the interwar instability in the Fixed Exchange-Rate System?

Answer 5

1. Inflation, political instability
2. Return to gold standard - it was extremely difficult to restabilize the system, it caused a lot of distress and high unemployment
3. 1929 - economic crisis - Great Depression:
   - No international leadership that could coordinate the crisis
   - Countries acted out of their own interest, often at the expense of global stability
4. Showed the vulnerability of fixed exchange systems - when economies are pegged to a fixed rate, they have the flexibility to adjust to changes

Question 6

What was the Semi-fixed exchange-rate system?

Answer 6

In the Bretton Woods system, adjustable fixed exchange rates were permitted.

Question 7

What was the “non-system” from the 1970s?

Answer 7

Countries can choose almost any exchange rate policy

Question 8

What are the external imbalances in the current issues of global monetary system?

Answer 8

• Global imbalances - a large and persistent differences in a particular currency:
• Some countries are constantly in surplus while others in deficits
• China-US exchange rates - China keeps its currency undervalued to boost exports which is against US interests because it leads to imbalances and problems in the industry

Question 9

What are the issues regarding the Eurozone in the global monetary system?

Answer 9

• Regional imbalances that can’t be adjusted because countries can’t devalue their currencies independent
• There needs to be greater fiscal integration, centralized management and a Eurozone budget