Chapter 10a International Monetary System

Chapter 10a International Monetary System - Chapter 10...

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10-1 Click to edit Master subtitle style Chapter 10 The International Monetary System
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10-2 Introduction Question: What is the international monetary system? The international monetary system refers to the institutional arrangements that govern exchange rates Recall that the foreign exchange market is the primary institution for determining exchange rates
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10-3 Introduction A floating exchange rate system exists in countries where the foreign exchange market determines the relative value of a currency Examples include the U.S. dollar, the European Union’s euro, the Japanese yen, and the British pound A pegged exchange rate system exists when 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 developing countries have pegged exchange rates
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10-4 Introduction A dirty float exists 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 adopted this policy in 2005 With a fixed exchange rate system countries fix their currencies against each other at a mutually agreed upon value 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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10-5 Introduction Question: What role does the international monetary system play in determining exchange rates? To answer this question, we have to look at the evolution of the international monetary system The Gold Standard The Bretton Woods system The International Monetary Fund The World Bank
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10-6 Classroom Performance System When the foreign exchange market determines the relative value of a currency, a ________ exchange rate system exists. a) Fixed b) Floating c) Pegged d) Market
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10-7 The Gold Standard Question: What is the Gold Standard? The origin of the gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value To facilitate trade, a system was developed so that payment could be made in paper currency that could then be converted to gold at a fixed rate of exchange
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10-8 Mechanics of the Gold Standard The gold standard refers to the practice of pegging currencies to gold and guaranteeing convertibility Under the gold standard, one U.S. dollar was defined as equivalent to 23.22 grains of "fine (pure) gold The exchange rate between currencies was based on the gold par value (the amount of a currency needed to purchase one ounce of gold)
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10-9 Strength of the Gold Standard The key strength of the gold standard was its 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 Many people today believe the world should return to the gold standard
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This note was uploaded on 09/23/2011 for the course ECON 101 taught by Professor Smith during the Spring '11 term at North Shore Community College.

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Chapter 10a International Monetary System - Chapter 10...

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