IB10 - International Monetary System JUAN CARLOS GARCA-PIA...

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Click to edit Master subtitle style 8/18/11 International Monetary System JUAN CARLOS GARCÍA-PIÑA ROSETE
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8/18/11 Introduction The institutional arrangements that countries adopt to govern exchange rates are known as the international monetary system When a country allows the foreign exchange market to determine the relative value of a currency, a floating exchange rate system exists When a country fixes the value of its currency relative to a reference currency, a pegged exchange rate system exists
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8/18/11 Introduction When a country tried to hold the value of its currency within some range of a reference currency, dirty float exists 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)
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8/18/11 The Gold Standard The gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value Payment for imports was made in gold or silver Later, as trade grew, payment was made in paper currency which was linked to gold at a fixed rate
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8/18/11 Mechanics Of The Gold Standard Pegging currencies to gold and guaranteeing convertibility is known as the gold standard In the 1880s, most of the world’s trading nations followed the gold standard Under the gold standard one U.S. dollar was defined as equivalent to 23.22 grains of "fine (pure) gold The amount of a currency needed to purchase one ounce of gold was called the gold par value
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8/18/11 Strength Of The Gold Standard The great strength of the gold standard was that it contained a powerful mechanism for 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
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8/18/11 The Period Between The Wars: 1918- 1939 The gold standard worked fairly well from the 1870s until the start of World War I in 1914 During the war, many governments financed their war expenditures by printing money, and in doing so, created inflation People lost confidence in the system and started to demand gold for their currency putting pressure on countries' gold reserves, and forcing them to suspend gold convertibility By 1939, the gold standard was dead
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8/18/11 The Bretton Woods System In 1944, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new international monetary system that would facilitate postwar economic growth Under the new agreement: a fixed exchange rate system was established all currencies were fixed to gold, but only the U.S. dollar was directly convertible to gold devaluations could not to be used for competitive purposes
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The Bretton Woods System The Bretton Woods agreement also established two multinational institutions: the International Monetary Fund (IMF)
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This note was uploaded on 08/17/2011 for the course BUSL 01342 taught by Professor Jenkins during the Winter '10 term at Ohio University- Athens.

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IB10 - International Monetary System JUAN CARLOS GARCA-PIA...

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