Chap010 - Chapter 10 - The International Monetary System...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 10 - The International Monetary System The International Monetary System INTRODUCTION A) The international monetary system refers to the institutional arrangements that countries adopt to govern exchange rates. When the foreign exchange market determines the relative value of a currency, that country is adhering to a floating system . The world’s four major trading currencies - the U.S. dollar, the European Union’s euro, the Japanese yen, and the British pound – are all floating currencies. B) A pegged exchange rate means that the value of a currency is fixed to a reference country and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate. Many states around the Gulf of Arabia peg their currencies to the U.S. dollar. C) A dirty float occurs when the value of a currency is determined by market forces, but with central bank intervention if it depreciates too rapidly against an important reference currency. China has adopted this policy in 2005. D) Countries that adopt a fixed exchange rate system fix their currencies against each other. Prior to the introduction of the euro, some European Union countries operated with fixed exchange rates within the context of the European Monetary System (EMS) . E) To understand how the current monetary system works, we must understand its evolution. THE GOLD STANDARD A) The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value - a practice that stretches back to ancient times. As the volume of international trade increased, governments agreed to convert paper currency into gold on demand at a fixed rate. Mechanics of the Gold Standard B) The practice of pegging currencies to gold and guaranteeing convertibility is known as the gold standard . For example, under the gold standard one U.S. dollar was defined as equivalent to 23.22 grains of "fine (pure) gold. C) The exchange rate between currencies was determined based on how much gold a unit of each currency would buy. The amount of a currency needed to purchase one ounce of gold was referred to as the gold par value . The Strength of the Gold Standard D) The great strength claimed for the gold standard was that it contained a powerful mechanism for simultaneously achieving balance-of-trade equilibrium (when the income a country’s residents earn from its exports is equal to the money its residents pay for imports) by all countries. The Period between the Wars, 1918-1939 10-1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 10 - The International Monetary System E) The gold standard worked fairly well from the 1870s until the start of World War I. Trying to spur exports and domestic employment, a number of countries started regularly devaluing their currencies, with the end result that people lost confidence in the system and started to demand gold for their currency. This put pressure on countries' gold reserves, and forced them to suspend gold convertibility. F) By the start of World War II, in 1939, the gold standard was dead.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/24/2010 for the course MARK 3336 taught by Professor Cox during the Spring '10 term at University of Houston - Downtown.

Page1 / 8

Chap010 - Chapter 10 - The International Monetary System...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online