International Political Economy Test 2 Part 1 The International Monetary system
what is a fixed exchange rate system
governments establish a fixed price for their currencies in terms of an external standard, such as gold or another countries currency.The government than maintains this fixed price by buying and selling currencies in the foreign exchange market . In order to conduct these transactions, governments hold a stock of other countries" currencies as foriegn exchange reserves
what causes exchange rates to change
imbalances between supply of and the demand for currencies in the foreign exchange market cause exchange market cause exchange rates to change. Ex: If more people want to buy than sell yen than the yen will appreciate
how are international transactions made possible
international transactions are possible only with an inexpensive means of exchanging one national currency for another
What is common about both fixed and floating exchange rate system balance of payments adjustment
In both systems a balance of payments adjustment occurs as prices fall in the country with the deficit and rise in the country with the surplus Also consumers in both scenarios respond to price changes by purchasing fewer now more expensive goods in the country with the surplus and more of the new cheaper goods in the country with the deficit.
how does balance of payment adjustments operate in a floating exchange rate system
It occurs trough exchange rate movements
how does balance of payment adjustments operate in a fixed exchange rate system
Trough changes in domestic prices
how is a currencies exchange rate system determined
a currencies exchange rate is determined by the interaction between the supply of and demand of foreign exchange markets
what is a current account
a current account records all current non financial transactions between American residents and the rest of the world. Debit is balanced against credit to produce an overall current account balance
what is an exchange rate system
a set of rules governing how much national currencies can appreciate and depreciate in the foreign exchange market
What are balance of payments
an accounting device that records all international transactions between a particular country and the rest of the world Ex: Anytime an American business exports or imports a product, the value of that transaction is recorded in the U.S balance of payments
Why do countries participate in the so called balance of payments adjustments
capital and current accounts can be imbalanced
Fixed but adjustable exchange rate system
currencies are given a fixed exchange rate against some standard and governments are required to maintain this exchange rate. However,governments can change the fixed price occasionally, usually under a set of well-defined circumstances.
Managed float system
most accurately characterizes the current international monetary system. In system governments do not allow their currencies to float freely. Instead, they intervene in the foreign exchange market to influence their currencies value against other currencies. There are no rules to govern when such intervention will occur.
what is a capital account
registers financial flows between the U.S and the rest of the world Ex: when an American resident purchases a foreign stock in another country this is considered capital outflow. Capital outflow is registers as negative items in the capital account. Capital outflows are set against capital inflows to produce a capital account balance.
How do you calculate the overall balance of payments position
simply add current account and capital account together.If a country has a current account deficit,it must have a capital account surplus. Ex: American current account deficit equalt the difference between American income and American expenditures in a given year
what is an exchange rate
the price of one currency in terms of another
floating exchange rate system
there are no limits on how much a currency can move in the foreign exchange markets value of one currency in floating system is decided entirely by private actors.
why is there not a world of more stable currencies
there is not a world of more stable currencies because the international monetary system requires governments to choose between currency stability and national economic autonomy
What is the sole purpose of the international monetary system
to facilitate economic exchange