PSCI 2223 study guide (3).pdf

During the time of the gold standard currency was

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During the time of the gold standard, currency was fixed, during the time of Bretton woods the monetary system was on an adjustable peg that was fixed to the US dollar and nowadays most currencies are free floating · Gold standard and Bretton woods provide currency stability and predictability which help facilitate international trade, investment and finance, but they cannot change the currency value when on a fixed exchange rate which a government may want to do during difficult economic times · Economic activities that are domestic favor a floating exchange rate→ What’s the difference between a floating exchange rate and fixed exchange rate??? https://www.youtube.com/watch?v=_pL_5trI6YY explains it pretty well, but basically Floating is based off of market forces vs fixed is the gov’ts manipulation of currency · A strong exchange rate allows consumers to buy more of the world’s goods and increase national purchasing power, hurts national producers who have to compete with foreigners in an international market – weak currency gives a boost to national production · Difference of interests within the country · International monetary systems is beneficial because it facilitates international exchange · Incentives to free ride in the international system · Currency crises usually result when government exchange rate commitments are not fully credible. In this sense they are analytically comparable to crises in military affairs that result when the threats and promises of governments are not fully credible · Difficult for a government to maintain a fixed exchange rate · Currency crises can move from one country to another quickly – great recession in 2008 · There is a common interest to contain currency crises, especially through international institutions like the IMF Discussion Questions: What are the pros and cons of international investments? Is it better for the government to have a currency that is appreciating or depreciating? In terms of currency and interest rates, is it preferable to favour domestic interests and economics or the national economy in the international realm?
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