Connect Chapter 11: The International Monetary System

benefits of floating exchange rate

+Markets set the rate = currency should not be under/over valued +Government does not need to intervene - helps a country deal with economic crisis

Benefits of a fixed exchange rate

- used to stabilize the value of a currency against the currency it is pegged to; it is designed to remove foreign exchange risk - lowers uncertainty - meant to impose discipline on the govt. issuing the pegged currency, as they must manage the economy to "support" the rate and cannot engage in policies that cause competitive devaluations - designed to diminish speculations by foreign exchange traders and others who may try to destabilize a currency (especially in one issued by a relatively small economy)

fixed

A currency board would look to ________ (fixed or floating?) exchange rates when converting currency.

one-size-fits-all

A major criticism of the IMF is that it imposes tight macroeconomic policy on any country it lends money to. This is referred to as a(n) _____approach. multi-objective one-size-fits-all flexible policy divergent

World Bank

A specialized agency of the United Nations that makes loans to countries for economic development, trade promotion, and debt consolidation. Its formal name is the International Bank for Reconstruction and Development. - established by Bretton Woods

fixed exchange rate

An exchange rate policy under which a government commits itself to keep its currency at or around a specific value in terms of another currency or a commodity, such as gold.

Moral Hazard

Arises when people behave recklessly because they know they will be saved if things go wrong - plays into effect with the IMF

volatile

Based on the present system, speculative buying and selling of currency tends to create __________ (stable or volatile?) movements in exchange rates.

decreased

Between 1985 and 1988, the U.S. dollar ______ in value relative to major trading currencies. increased decreased

managed float system (dirty float)

exchange-rate system in which currencies float against one another, with governments intervening to stabilize their currencies at particular target exchange rates

borrowing private money

Since the 1970s, developed countries like Great Britain and the US have tended to finance their deficits by ______. selling foreign bonds borrowing from the World Bank drawing on IMF funds borrowing private money

Bretton Woods System

The economic order negotiated among allied nations at Bretton Woods, New Hampshire, in 1944, which led to a series of cooperative arrangements involving a commitment to relatively low barriers to international trade and investment.

US dollar

The fixed-rate exchange system established at Bretton Woods eventually collapsed. This collapse is attributed to the role of the ______ in the system. US dollar gold standard euro pound

1800s

The gold standard was embraced by most of the world's major trading countries in the late ______. 1700s 1900s 2000s 1800s

fixed peg

The most common exchange rate regime used today is the ______ arrangement, used by 43% of the nations. free float spot exchange fixed peg managed float

IMF

The policy position of the ______ is that when this institution lends money to countries, it imposes a tight macroeconomic policy that is not always considered appropriate by critics. UN WTO IMF NAFTA

importing; exporting

The start of the demise of the fixed exchange rate system was notable in 1971 when the US was ______ more than ______. importing; extending loans raising interest rates; exporting importing; exporting exporting; importing

quadrupled

The value of the US dollar declined during the OPEC oil crisis in 1971 when the price of oil ______. stabilized dropped quadrupled doubled

False

True or false: Most economists agree that a fixed exchange rate system is preferable to a floating exchange rate system. True False

The dollar has had numerous rapid increases and subsequent downfalls.

What is the best description of the value of the US dollar against trading currencies from 1973 to now? The dollar has had numerous rapid increases and subsequent downfalls. Up until 1973, the dollar fluctuated frequently but remained constant following that time. The dollar has remained stable throughout this time period.

monetary

What type of discipline is inherent in a fixed exchange rate system? military political tax monetary

depression

When Great Britain returned to the gold standard in 1925, it placed the pound at the prewar gold parity level and, as a result, placed the country in a period of ______. stagflation high inflation high economic growth depression

foreign debt

When a country cannot service its obligations on debt in foreign countries, it is experiencing a ______ crisis. currency banking foreign debt

speculation

While it is hard to determine which side is right in the debate over fixed exchange rates and floating exchange rates, it is evident that the fixed exchange rate regime of the Bretton Woods era probably will not work since ______ broke the system originally. speculation arbitrage technology tariffs

Jamaica Agreement

the 1976 international monetary order that allowed countries to adopt different exchange rate systems including floating their currencies in world markets

Banking Crisis

a loss of confidence in the banking system that leads to a run on banks, as individuals and companies withdraw their deposits

International Monetary Fund (IMF)

an international organization that acts as a lender of last resort, providing loans to troubled nations, and also works to promote trade through financial cooperation - established by Bretton Woods - provides order for international monetary system

currency board

country converts its domestic currency on demand into another currency at a fixed exchange rate. - Holds reserves of foreign currency to at least 100% of domestic currency issued.

pegged exchange rate

currency value is fixed relative to a reference currency, such as the dollar or Euro

international monetary system

institutional arrangements countries adopt to govern exchange rates

balance-of-trade equilibrium

reached when the income a nation's residents earn from exports equals money paid for imports

Dollarization

when a poorer country ties the value of its currency to that of a wealthier country, or when it abandons its currency and adopts the wealthier country's currency as its own

Currency Crisis

when a speculative attack on the exchange value of a currency results in a sharp depreciation in the currency value

floating exchange rate regime

when the foreign exchange market determines the relative value of a currency