Chapter 10

Chapter 10 - Chapter 10 INTRODUCTION International Monetary...

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Chapter 10 INTRODUCTION International Monetary system – institutional arrangements that countries adopt to govern exchange rates. Floating Exchange Rate – A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand. The world’s four major trading currencies are: U.S. dollar European Union’s euro Japanese yen British pound Pegged Exchange Rate – Currency value is fixed relative to a reference currency. Belize pegs its currency to U.S. dollars and the exchange rate between Belizean and euro is determined by the U.S. dollar/euro exchange rate. Dirty-float system – A system under which a country’s currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value. Central Bank – Generic name given to a country’s primary monetary authority, such as the Federal Reserve System in the United States or the Bank of Canada in Canada. It usually has the responsibility for issuing currency, administering monetary policy, holding member banks’ deposits, and facilitating the nation’s banking industry. Fixed Exchange Rate – A system under which the exchange rate for converting one currency into another is fixed. Pegged, dirty-float, and fixed exchange rate systems all require some degree of government intervention in the foreign exchange market to maintain the value of a currency IMF does not simply lend money to a country in trouble. In exchange for the loan, it requires that the government adopt policies designed to correct whatever economic problems caused the depreciation in the nation’s currency. THE GOLD STANDARD The gold standard had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value. When international trade was limited in volume, gold was used for payment. As international trade expanded due to Industrial Revolution, paper currency has been created it and governments agree to convert the paper currency into gold on demand at a fixed rate. MECHANICS OF THE GOLD STANDARD Gold standard – The practice of pegging currencies to gold and guaranteeing convertibility. By 1880, World’s major trading nations: Great Britain, Germany, Japan and U.S. had adopted the gold standard. STRENGTH OF THE GOLD STANDARD
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Chapter 10 - Chapter 10 INTRODUCTION International Monetary...

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