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INBS 346--Chapter 10, Ball et al

INBS 346--Chapter 10, Ball et al - Chapter Ten Chapter...

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Chapter Ten Chapter Ten Understanding the International Monetary System and Financial Forces
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1-2 10-2 Bretton Woods System Bretton Woods System h The Bretton Woods system was a gold exchange standard with the U.S. dollar fixed to $35 to the ounce - Other currencies’ par values fixed to the dollar - System agreed to in 1945 and abandoned in 1971 when the U.S. eliminated the convertibility of the U.S. dollar to gold
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1-3 10-3 Evolution to Floating Exchange Rates - US dollar was initial cornerstone of IMF established fixed rates - In the early 1970’s the US dollar became unsteady and was devalued - IMF then had to change policies to accommodate floating exchange rates
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1-4 10-4 Exchange Rate Arrangements: Broad Categories - Peg the exchange rate to another currency or basket of currencies with little or no flexibility [Ecuador, El Salvador, Finland, Niger] E Peg the exchange rate to another currency or basket of currencies with trading occurring within a band [Denmark, Cyprus, Hungary] E Allow the currency to float in value against other currencies, either managed or not managed [Britain, Brazil, India, Norway, Turkey, So. Africa, USA]
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1-5 10-5 Exchange Rate Determination 1. In a free market, the exchange rate (that is, price of any currency) is determined by supply and demand. Thus all else being equal: The greater the supply of a currency, the lower its price. The lower the supply of a currency, the higher its price. The greater the demand for a currency, the higher its price. The lower the demand for a currency, the lower its price 2. Demand for a country’s currency is a function of the demand for that country’s goods, services, and financial assets.
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1-6 10-6
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