Chapter 9: International Monetary Relations

(IQ) Imagine that on January 1 a person could exchange one dollar for one euro. Later that year, on December 1, the person could exchange one dollar for two euros. We would therefore say that the dollar had ______________ relative to the euro, whereas the euro had ______________ relative to the dollar.

Appreciated // Been Devalued (*In Full Sentence*) Imagine that on January 1 a person could exchange one dollar for one euro. Later that year, on December 1, the person could exchange one dollar for two euros. We would therefore say that the dollar had appreciated relative to the euro, whereas the euro had been devalued relative to the dollar.

Which of the following best captures the relationship between interest rates and exchange rates? A) There is no relationship between interest rates and the strength of a currency B) A country with higher interest rates will tend to have a stronger currency C) A country with higher interest rates will tend to have a weaker currency D) Only those countries with a powerful central bank can have both interest rates and exchange rates

B) A country with higher interest rates will tend to have a stronger currency

If Canada decides to tie its currency to the value of the U.S. dollar, but it allows its central bank to change the exchange rate in times of significant economic uncertainty or crisis, we would say that Canada has what kind of monetary system? A) Fixed exchange rate B) Commodity standard C) Adjustable peg D) Floating exchange rate

C) Adjustable peg

Because it is often charged with adjusting national interest rates or exchange rates, a country's _________ is a key tool of _________. - Bretton Woods Institution - Central Bank - Monetary Police - The Gold Standard

Central Bank // Monetary Police (*In Full Sentence*) Because it is often charged with adjusting national interest rates or exchange rates, a country's central bank is a key tool of monetary police.

Why did many European countries face difficult currency decisions in 1991 and 1992? - They were suffering from internal political violence that made investors hesitant to invest in their currencies - They had pegged their currency to the German Deutschmark, and Germany was engaging in rapid interest rate increases - They had large government debts they could no longer afford to pay off - They wanted to remove their currency from its ties to the gold standard, but the United States would not allow them to

Correct Answer: - They had pegged their currency to the German Deutschmark, and Germany was engaging in rapid interest rate increases Incorrect Answer: - They wanted to remove their currency from its ties to the gold standard, but the United States would not allow them to - They were suffering from internal political violence that made investors hesitant to invest in their currencies - They had large government debts they could no longer afford to pay off

Choose all of the following that are principal features of an international monetary regime. - Funding for international organizations to help set exchange rates - An understanding of whether currencies are fixed, floating, or a combination thereof - Rules about allowable trade barriers between states - Agreement on what benchmark or standard currency value will be based on

Correct Answers: - An understanding of whether currencies are fixed, floating, or a combination thereof - Agreement on what benchmark or standard currency value will be based on Incorrect Answers: - Rules about allowable trade barriers between states - Funding for international organizations to help set exchange rates

Why might a government want a fixed exchange rate? Sort the options into correct answers or incorrect answers? - Fixed exchange rates facilitate international trade - Fixed exchange rates keep prices stable - Currency manipulation is easier with a fixed exchange rate - Governments have more flexibility in monetary policy with fixed exchange rates

Correct Answers: - Fixed exchange rates facilitate international trade - Fixed exchange rates keep prices stable Incorrect Answers: - Currency manipulation is easier with a fixed exchange rate - Governments have more flexibility in monetary policy with fixed exchange rates

Which of the following were features of the gold standard international monetary regime? Choose all that are correct. - It limited the independence of a country's monetary policy - The system relied on major financial powers being willing to stabilize each other through emergency loans - Currency was backed by national government commitments rather than being tied to the value of a precious metal - It proved contentious in places like the United States

Correct Answers: - It proved contentious in places like the United States - The system relied on major financial powers being willing to stabilize each other through emergency loans - It limited the independence of a country's monetary policy Incorrect Answers: - Currency was backed by national government commitments rather than being tied to the value of a precious metal

Choose all of the following that are reasons a country might want a weak currency relative to other currencies. - A weaker currency increases the purchasing power of domestic consumers and importers - A weaker currency allows groups such as domestic farmers to be more competitive on the international market - A weaker currency allows a country's citizens to purchase more with their currency when abroad - A weaker currency encourages foreigners to buy its goods

Correct Answers: - A weaker currency allows groups such as domestic farmers to be more competitive on the international market A weaker currency encourages foreigners to buy its goods Incorrect Answers: - A weaker currency allows a country's citizens to purchase more with their currency when abroad - A weaker currency increases the purchasing power of domestic consumers and importers

In the late 1800s and early 1900s, many in the United States advocated for a silver standard to replace the prevailing gold standard. Which of the following were arguments made by supporters of the silver standard? - It would have helped debtors - It would have lowered domestic prices for goods - It would make American exports more competitive by devaluing the dollar - It would have helped creditors

Correct Answers: - It would make American exports more competitive by devaluing the dollar - It would have helped debtors Incorrect Answers: - It would have lowered domestic prices for goods - It would have helped creditors

What is the difference between depreciation and devalue?

Devaluation happens when a government makes monetary policy to reduce a currency's value On the other hand, depreciation happens as a result of supply and demand in a free foreign exchange market.

T/F: The United States is currently on a fixed exchange rate with the dollar pegged to the value of gold.

False Expl: Although the United States was on this kind of standard for many decades, it is currently on a floating exchange rate.

T/F: Under an international monetary regime that uses a national paper currency standard, national governments issue paper currency with a fixed value in terms of gold or a similar commodity.

False You're thinking of a commodity-backed paper standard system that fixes its currency to a commodity, usually gold. With a national paper currency standard, currency is backed up by the commitments of issuing government to support it.

Which groups or individuals would benefit more from a floating currency, and which would benefit more from a fixed currency? - Businesses that conduct international trade - Businesses that are entirely domestic in nature - Central banks

Floating Currency - Businesses that are entirely domestic in nature - Central banks Fixed Currency - Businesses that conduct international trade

_______________ was the hardest hit among nations in Europe's currency crisis in the early 2010s and was nearly forced to leave the _____________ on account of its sizable national debt. - Greece - Ireland - Portugal - Germany - United Nations - Eurozone - European Union

Greece // Eurozone (*In Full Sentence*) Greece was the hardest hit among nations in Europe's currency crisis in the early 2010s and was nearly forced to leave the eurozone on account of its sizable national debt.

How do interest rates affect the demand of the currency and how does it affect the currency itself (appreciate or depreciate)?

Higher interest rates make it more profitable for people to put (or keep) their money in the country, so higher interest rates increase the demand for the currency and lead to its appreciation.

If a states interest rates are higher, investments in the state promise higher or lower rate of return?

Higher rate of return

QUESTION ON OTHER SIDE Correct Answers: - Countries with a smaller percentage of loans in foreign currency were more likely to depreciate their currency - Depreciating one's currency correlated with better economic outcomes Incorrect Answers: - Depreciating a currency correlated with better employment outcomes but worse overall GDP growth - Countries that had a large amount of loans in foreign currencies devalued their own currency proportionately to lower their debt burden

Study the following table that examines the relationship between foreign-currency debt and currency depreciation in five European countries that had recently joined the European Union. Which of the following statements are best supported by the data in the table? - Depreciating a currency correlated with better employment outcomes but worse overall GDP growth - Countries that had a large amount of loans in foreign currencies devalued their own currency proportionately to lower their debt burden - Countries with a smaller percentage of loans in foreign currency were more likely to depreciate their currency - Depreciating one's currency correlated with better economic outcomes

In MOST countries, national monetary policy is implemented by what institution or state?

The Central bank

Central Bank

The institution that regulates monetary conditions in an economy, typically by affecting interest rates and the quantity of money in circulation. (411)

Bretton Woods Monetary System

The monetary order negotiated among the World War II Allies in 1944, which lasted until the 1970s and which was based on a U.S. dollar tied to gold. Other currencies were fixed to the dollar but were permitted to adjust their exchange rates. (412) -- Typically such changes were infrequent, occurring once every five to seven years

Gold Standard

The monetary system that prevailed between about 1870 and 1914, in which countries tied their currencies to gold at a legally fixed price. (411)

Exchange Rate

The price at which one currency is exchanged for another. (409)

What do foreigners considering investing in a country look to?

They weigh relative interest rates; if U.S. interest rates are higher, investments in the United States promise a higher rate of return

Devalue

To reduce the value of one currency relative to other currencies. (409)

T/F: The eurozone crisis in the early 2010s originated in countries such as Greece, Ireland, Portugal, and Spain.

True These nations had borrowed heavily since the creation of the euro and found they could not continue to service their debt once borrowing costs increased after the onset of the 2008 recession.

What is the most relevant factor of supply and demand in regard to currency value determination?

interest rates

Place the following eras of exchange rates in order, from oldest to most recent. - Floating exchange rate used for major currencies like the dollar, euro, and yen - Fixed exchange rate using the gold standard - Bretton Woods monetary system using an adjustable peg

- Fixed exchange rate using the gold standard - Bretton Woods monetary system using an adjustable peg - Floating exchange rate used for major currencies like the dollar, euro, and yen

Put the steps of a typical currency crisis in order from first to last. -Investors sell off the nation's currency, exchanging it for a more reliable foreign currencies -The government devalues its currency - The government commits itself to a fixed exchange rate. -The Government faces difficulty in sticking to its promised exchange rate -People, especially investors, lose faith in the government's ability to keep its exchange rate.

- The government commits itself to a fixed exchange rate. -The Government faces difficulty in sticking to its promised exchange rate -People, especially investors, lose faith in the government's ability to keep its exchange rate. -Investors sell off the nation's currency, exchanging it for a more reliable foreign currencies -The government devalues its currency

The fictional state of Atlantis contains many groups within it. Some of these groups would prefer that Atlantis has a strong currency while others would prefer a weak currency. Indicate which type of currency the following groups would prefer. 1) Domestic Consumers 2) Farmers 3) Tourists who travel overseas 4) Domestic manufacturers who sell overseas

1) Domestic Consumers: Strong Currency 2) Farmers: Weak Currency (Explanation: Farmers often compete on a global market; they therefore prefer a weak currency so that their products are cheaper in other countries.) 3) Tourists who travel overseas: Strong Currency (Explanation: The stronger one's currency, the further it will go when traveling in countries using other currencies.) 4) Domestic manufacturers who sell overseas: Weak Currency (Explanation: Manufacturers are the primary group who complain about a strong currency, as a weaker currency makes their goods cheaper to sell overseas and thus drives overseas sales.)

Suppose you were the chief finance minister of your country. You are responsible for facilitating trade with your regional partners by picking an exchange rate system. Order the following systems from the system which will offer you the greatest flexibility in altering exchange rates to the one that offers the least flexibility. - Floating Exchange Rate - Gold Standard - Adjustable Peg

1. Floating Exchange Rate 2. Adjustable Peg 3. Gold Standard

International Monetary Regime

A formal or informal arrangement shared by most countries in the world economy to govern relations among their currencies. (424)

Adjustable Peg

A monetary system of fixed but adjustable rates. Governments are expected to keep their currencies fixed for extended periods but are permitted to adjust the exchange rate from time to time as economic conditions change. (412) -- An adjustable peg is an exchange rate policy in which a currency is pegged or fixed to a major currency such as the U.S. dollar or euro, but which can be readjusted to account for changing market conditions or macroeconomic trends.

Fixed Exchange Rate

An exchange‐rate policy under which a government commits itself to keep its currency at or around a specific value relative to another currency or a commodity, such as gold. Compare floating exchange rate. (411)

Floating Exchange Rate

An exchange‐rate policy under which a government permits its currency to be traded on the open market without direct government control or intervention. Compare fixed exchange rate. (412)

Monetary Policy

An important tool of national governments to influence broad macroeconomic conditions such as unemployment, inflation, and economic growth. Typically, governments alter their monetary policies by changing national interest rates or exchange rates. (411)

When a country's currency appreciates, is it more or less expensive for foreigners to buy the country's goods and services?

More

How does the central bank go about stimulating the economy?

If the bank wants to stimulate the economy, it lowers interest rates Lower interest rates makes it easier for people and companies to borrow, which in turn encourages the economy to expand

How does the central bank go about restraining the economy?

If the central bank wants to restrain the economy, typically because prices are rising and there is concern about inflation, it raises interest rates/ this makes it harder to borrow and retains demand

Depreciate

In terms of a currency, to decrease in value relative to other currencies. Compare appreciate. (409)

Appreciate

In terms of a currency, to increase in value relative to other currencies. Compare depreciate. (409)

When a country's currency depreciates, is it more or less expensive for foreigners to buy the country's goods and services?

Less