Week 3 International Monetary System Flashcards
What was a way of payment before ?
Gold was a way of payment
How the exchange rate between currencies were determined ?
The exchange rate was determined by the gold content of each country
Could gold be exchange by notes and vise verse ?
Yes
Could gold be importared or exported ?
Yes
Gold standard, does the countries needed to maintain a adequate gold reserve to back its currency value in order for it to function ?
Yes
How the exchange rate was settle in gold standers?
It was set by their relative gold contents which means more gold the country has more appreciated was their currency
What are the benefits of gold standard?
High stable exchange rate
Stable inflation - gold has natural scarcity in nature ! If gold sole base for money creation , then money supply cannot get out and cause inflation
Problems of gold standard
Shortcomings:
The supply of newly minted gold is restricted , growth of world trade and investment can be hampered for the lack of sufficient monetary reserves.
There is no mechanism to compel countries to abide by the rule of the game
When ended the classic gold ?
In the world war 1
Explain Breton woods system
Design a postwar international monetary system
The goals was exchange rate stability without gold standard.
The result was the creation of IMF and the world bank
The only currency possible to convert to gold was Dólar, because of that made dollar as the main currency
Explain the collapse of Breton woods system
Triffin paradox - fundamental conflicts when a national currency in this case dollar serves as currency reserve. Made the US who issuing the global reserve country must run large BOP deficits to supply the world with $ to fulfill would demand for foreign exchange. People start to convert $ to gold making the US gold reserve decrease.
This resulted US with high inflation
U.S expansionary monetary policy to finance the Vietnam war
When gold was abandoned, what was the regime and what the central bank could do ?
We start a flexible exchange rate and the central banks were allowed to intervine
Explain free float
Market forces of supply and demand to determine currency value
Forces influenced by prices , interest rate and economic growth
Rates fluctuate
Explain managed float
Combine government intervention with market forces to set exchange rates
Market forces set rates unless excess volitility occurs
Central banks active intervention without specific pre announcement
