Financial Markets - Chapter 18 Presentation

Financial Markets - Chapter 18 Presentation - Exchange Rate...

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Exchange Rate Regimes in the  Exchange Rate Regimes in the  International Financial System International Financial System
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Gold Standard The gold standard is a commitment by participating countries to fix the price of their domestic currencies in terms of a specific amount of gold The gold standard is not currently used by any government or central bank, having been replaced completely by fiat money Fiat money is intrinsically useless; used only as the medium of exchange The period from 1880 to 1914 is known as the classic gold standard, during this period unprecedented economic growth occurred along with free trade in goods, labor, and capital
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Gold Standard continued Fiat money and the gold standard protected citizens form hyperinflation and other abuses of monetary policy after the Great Depression The gold standard, in theory, limits the power of governments to inflate prices through excessive issuance of paper currency. Gold standard supposed to create certainty in international trade by providing a fixed pattern of exchange rates Based on fixed exchanged rates the gold standard created a result of balanced prices among countries August 15, 1971, President Nixon announced that the United States would no longer redeem currency for gold, this was the final step in abandoning the gold standard
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Pros/Cons to Gold Standard Gold Standard killed inflation Between 1880 to 1914 annual inflation with gold standard was .01% Without the gold standard the annual inflation rate averaged 4.2% between 1971 to 1990 Gold standard gives government very little discretion to use monetary policy, economies on the gold standard are less likely to avoid or offset either monetary or real shocks Large Negative to gold standard: the resource cost of gold production
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This note was uploaded on 09/10/2008 for the course E/M 272 taught by Professor Huang during the Spring '08 term at Gustavus.

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Financial Markets - Chapter 18 Presentation - Exchange Rate...

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