ECON321 Chapter 16

The Bretton Woods Conference took place in:

1944.

Floating exchange rates were prominent during the period of:

1973-2000.

European Monetary System (EMS)

A formal system of fixed exchange rates agreed to by a group of member countries of the European Community in 1979.

Marshall Plan

A huge assistance program undertaken by the United States in 1948 to provide the financial means for European countries to recover from World War II.

Common Agricultural Policy (CAP)

A joint price-support/regulatory policies adopted in the 1960s by the six members of the European Economic Community, which marked the beginning of the path beyond a simple common market toward a greater economic union in Europe.

customs union

A trade bloc in which the member countries agree not only to allow the free trade of goods between their economies, but also to maintain a set of common tariffs and other trade restrictions against nonmember countries.

Louvre Accord

An agreement among major economies of the world to stop the depreciation of the U.S. dollar in 1987.

fundamental disequilibrium

An exchange rate that is not compatible with the monetary and fiscal policies necessary to maintain full employment and economic growth.

devaluation

An intentional one-time lowering of the fixed value of a currency under a fixed exchange rate arrangement.

In 2001, the euro became the official currency of all of the European Union members at that time, except:

Denmark, Sweden, and Britain

In 1979, a number of European countries formally established a system that fixed exchange rates between their currencies, which was called the:

European Monetary System (EMS).

Among the criteria that countries had to satisfy before they could join the European Monetary Union in 2002 were:

Inflation had to be less than 1.5 percent above the average inflation rate of the three European countries with the lowest inflation.

European Atomic Energy Community

One of the early agencies created by the six countries what would become the initial members of the European Economic Community (EEC), this organization was designed to reduce fears that former World War II adversaries would develop competing nuclear arsenals as a by-product of broader nuclear research.

International Monetary Fund (IMF)

One of the institutions created at the Bretton Woods Conference intended to provide international liquidity and foreign reserves to enable central banks to keep exchange rates pegged.

International Clearing Union

Proposed by John Maynard Keynes around the time of the Bretton Woods Monetary Conference, the ICU would enforce balanced trade by limiting deficit countries' ability to run persistent trade deficits and by confiscating accumulated reserves of countries that ran persistent surpluses.

Second Amendment (to the Bretton Woods agreement)

The 1978 agreement that officially legalized the floating exchange rates that had been a fact since 1973, which also authorized the IMF to monitor and critique countries' economic policies on a continual basis.

Single European Act

The 1986 agreement among the European Union countries, which set out a precise timetable for completing 275 steps necessary to establish a true common market by the start of 1993.

International Bank for Reconstruction and Development

The World Bank.

General Agreement on Trade and Tariffs (GATT)

The agreement reached by the major economies after World War II (1947) that established the legal framework within which international trade policy was to be set and trade negotiations were to be conducted.

Plaza Accord

The agreement signed in 1985 by France, Germany, Japan, and the United States, which specified the national policies each country would adopt in order to push the value of the U.S. dollar down and enable the United States to balance its trade.

Bretton Woods Agreement

The agreement signed on July, 1944 that outlines the post-World War II international financial order.

Paris Peace Conference

The conference of world leaders that met for six months in 1919 to establish international institutions such as the League of Nations and the Bank for International Settlements, as well as draw up the peace treaty to formalize the 1918 armistice that ended World War I.

Stability and Growth Pact

The criteria adopted in 2002 for members of the euro area to continue to participate in the single currency scheme, which were often ignored and thus did not prevent the crisis in 2010-2011.

European Free Trade Area (EFTA)

The economic integration scheme that joined most European countries not in the European Economic Community, this remained essentially a free trade area in contrast to the much more integrated European Union.

adjustable exchange rate peg

The exchange rate arrangement under the Bretton Woods order, which required central banks to intervene in the foreign exchange market to keep currencies within a narrow band around a target exchange rate, except in the case of a fundamental disequilibrium.

European Coal and Steel Community

The first step toward European economic integration, this agency sought in 1950 to reduce fears of Germany's industrial recovery among other European countries.

European Economic Community (EEC)

The formal name of the common market formed in 1958 by France, Germany, Italy, and the Benelux countries.

European Monetary Union (EMU)

The group of European countries that have established a single currency, the euro, to be administered by a single European Central Bank.

World Bank

The institution proposed during the Bretton Woods Conference in 1944 to serve as lender for projects to help economies recover from World War II and to foster economic growth.

bancor

The international reserve currency suggested by John Maynard Keynes in the early 1940s which would be managed by an International Clearing Union (ICU).

Rambouillet Summit

The meeting in 1975 where the Bretton Woods countries worked out a new international monetary order to create a "stable system" of exchange rates, but not a "system of stable exchange rates," as some countries had urged.

euro

The name of the single currency managed by the European Central Bank and, in 2011, used by over half of the members of the European Union.

Fiscal free rider

The potential for individual countries to borrow at favorable rates, and thus borrow too much, because their borrowing costs reflect those of the whole group rather than their own debt levels and repayment capacity.

Monetary order

The rules, laws, and regulations that govern international transactions and the foreign exchange markets, which together with the public and private institutions that carry out, regulate, and control international financial transactions, defines the international financial system.

pegged exchange rate

The term used to describe the arrangement under the Bretton Woods order whereby central banks intervened in the foreign exchange market to keep currencies within a 1 percent band around an openly stated target exchange rate except in the case of a fundamental disequilibrium that clashed with the long-run aims of full employment and economic growth.

snake in the tunnel

The tighter bands for exchange rates that were maintained between European currencies while the whole group of currencies was permitted to fluctuate more widely against the rest of the world's currencies.

Maastricht Treaty

The treaty signed in 1991 by members of the European Union in which they agreed to establish a single currency to replace members' individual currencies.

Among the policies, organizations, or treaties that provided new institutions that eventually resulted in the European Union is:

a. The European Coal and Steel Community (ECSC) b. The 1992 Maastricht Treaty c. The 1997 Amsterdam Treaty d. All of the above e. None of the above. d

Under the Bretton Woods system, foreign exchange market intervention was carried out by:

a. the International Monetary Fund. b. the World Bank. c. the Federal Reserve Bank of the United States. d. All of the above. e. None of the above e (each country's central bank)

The Bretton Woods Conference led to the establishment of:

a. the World Bank. b. the IMF. c. pegged exchange rates. d. All of the above. e. None of the above. d

The Bretton Woods system was followed by:

an informal system of floating exchange rates for the major currencies.

In terms of the trilemma, the floating exchange rates of the current international financial system effectively imply the choice of:

capital mobility and policy independence over a fixed exchange rate.

The Bretton Woods system was similar to the gold standard in that:

exchange rates remained fixed.

In 2002, 12 European countries:

exchanged their national currencies for a single currency called the euro.

The Bretton Woods agreement lasted:

for about 25 years after World War II.

The evidence suggests that the floating exchange rates in the 1970s and 1980s:

had no adverse effect on the rate of growth of trade.

In the late 1960s the higher U.S. rate of inflation, relative to that of Germany, caused the German central bank to have to:

increase the supply of marks.

When exchange rates began to float in 1973, they were:

much more volatile than expected.