CHAPTER 2 International Monetary System.docx
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CHAPTER 2 International Monetary System.docx
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CHAPTER2InternationalMonetarySystem
CHAPTER2InternationalMonetarySystem
EvolutionoftheInternationalMonetarySystem
Bimetallism:
Before1875
ClassicalGoldStandard:
1875–1914
InterwarPeriod:
1915–1944
BrettonWoodsSystem:
1945–1972
TheFlexibleExchangeRateRegime:
1973–Present
TheCurrentExchangeRateArrangements
EuropeanMonetarySystem
TheEuroandtheEuropeanMonetaryUnion
ABriefHistoryoftheEuro
WhatAretheBenefitsofMonetaryUnion?
CostsofMonetaryUnion
ProspectsoftheEuro:
SomeCritical
Questions
TheMexicanPesoCrisis
TheAsianCurrencyCrisis
OriginsoftheAsianCurrencyCrisis
LessonsfromtheAsianCurrencyCrisis
TheArgentinePesoCrisis
FixedversusFlexibleExchangeRateRegimes
Summary
MINICASE:
WilltheU.K.JointheEuroClub?
EvolutionoftheInternationalMonetarySystem
1)Theinternationalmonetarysystemcanbedefinedastheinstitutionalframeworkwithinwhich:
a)internationalpaymentsaremade
b)movementofcapitalisaccommodated
c)exchangeratesamongcurrenciesaredetermined
d)alloftheabove
Answer:
dpage25.
2)Theinternationalmonetarysystemwentthroughseveraldistinctstagesofevolution.Thesestagesaresummarized,inalphabeticorder,asfollows
(i)-Bimetallism
(ii)-BrettonWoodssystem
(iii)-Classicalgoldstandard
(iv)-Flexibleexchangerateregime
(v)-Interwarperiod
Thechronologicalorderthattheyactuallyoccurredis:
a)(iii),(i),(iv),(ii),and(v)
b)(i),(iii),(v),(ii),and(iv)
c)(vi),(i),(iii),(ii),and(v)
d)(v),(ii),(i),(iii),and(iv)
Answer:
b
Bimetallism:
Before1875
3)Gresham’sLawstatesthat
a)Badmoneydrivesgoodmoneyoutofcirculation.
b)Goodmoneydrivesbadmoneyoutofcirculation
c)Ifacountrybasesitscurrencyonbothgoldandsilver,atanofficialexchangerate,itwillbethemorevaluableofthetwometalsthatcirculate.
d)Noneoftheabove.
Answer:
a
4)Inthe1850stheFrenchfrancwasvaluedbybothgoldandsilver,undertheofficialFrenchratiowhichequatedagoldfranctoasilverfranc15½timesasheavy.Atthesametime,thegoldfromnewlydiscoveredminesinCaliforniapouredintothemarket,depressingthevalueofgold.Asaresult,
a)Thefranceffectivelybecameasilvercurrency.
b)Thefranceffectivelybecameagoldcurrency.
c)SilverbecameovervaluedundertheFrenchofficialratio
d)Answersa)andc)arecorrect
Answer:
b
5)Supposethatthepoundispeggedtogoldat£20perounceandthedollarispeggedtogoldat$35perounce.Thisimpliesanexchangerateof$1.75perpound.Ifthecurrentmarketexchangerateis$1.80perpound,howwouldyoutakeadvantageofthissituation?
Hint:
assumethatyouhave$350availableforinvestment.
a)Startwith$350.Buy10ouncesofgoldwithdollarsat$35perounce.Convertthegoldto£200at£20perounce.Exchangethe£200fordollarsatthecurrentrateof$1.80perpoundtoget$360.
b)Startwith$350.Exchangethedollarsforpoundsatthecurrentrateof$1.80perpound.Buygoldwithpoundsat£20perounce.Convertthegoldtodollarsat$35perounce.
c)a)andb)bothwork
d)noneoftheabove
Answer:
a
6)Priortothe1870s,bothgoldandsilverwereusedasinternationalmeansofpaymentandtheexchangeratesamongcurrenciesweredeterminedbyeithertheirgoldorsilvercontents.Supposethatthedollarwaspeggedtogoldat$30perounce,theFrenchfrancispeggedtogoldat90francsperounceandtosilverat6francsperounceofsilver,andtheGermanmarkpeggedtosilverat1markperounceofsilver.WhatwouldtheexchangeratebetweentheU.S.dollarandGermanmarkbeunderthissystem?
a)1Germanmark=$2
b)1Germanmark=$0.50
c)1Germanmark=$45
d)1Germanmark=$1
Answer:
apage26.
Rationale:
Startwith$30,buyoneounceofgold.SellthatounceofgoldforFF90.SelltheFF90for15ouncesofsilver.Buy15Germanmarks.Thus,$30=DM15.
ClassicalGoldStandard:
1875-1914
7)An“international”goldstandardcanbesaidtoexistwhen
a)goldaloneisassuredofunrestrictedcoinage
b)thereistwo-wayconvertibilitybetweengoldandnationalcurrenciesatstableratios
c)goldmaybefreelyexportedorimported
d)alloftheabove
Answer:
d-p.28
8)SupposethattheBritishpoundispeggedtogoldat£6perounce,whereasoneounceofgoldisworth€12.Underthegoldstandard,anymisalignmentoftheexchangeratewillbeautomaticallycorrectedbycrossborderflowsofgold.Calculatethepossiblesavingsforbuying€1,000,iftheBritishpoundbecomesundervaluedandtradesfor€1.80.(Assumezeroshippingcosts).
(Hint:
GoldisfirstpurchasedusingthedevaluedBritishpoundfromtheBankofEngland,thenshippedtoFranceandsoldfor€1,000totheBankofFrance).
a)£55.56
b)£65.56
c)£75.56
d)£85.56
Answer:
a-p.28
Rationale:
SinceanounceofgoldshouldbeworththesamenorthorsouthoftheEnglishChannel,itshouldbe€12=£6.Soourexchangerateimpliedbygoldpricesis€2=£1,thereforebuying€1,000shouldcost£500:
€1,000×£1/€2=£500.00
Ifthepoundisundervaluedat€1.80,wefindthat€1,000costs£555.56:
€1,000×£1/€1.80=£555.56
Savingsinbuying€1,000byusinggoldandnotpostedexchangerates:
£555.56-£500.00=£55.56
9)Underagoldstandard,ifBritainexportedmoretoFrancethanFranceexportedtoGreatBritain,
a)Suchinternationalimbalancesofpaymentwillbecorrectedautomatically.
b)Thistypeofimbalancewillnotbeabletopersistindefinitely
c)NetexportfromBritainwillbeaccompaniedbyanetflowofgoldintheoppositedirection.
d)Alloftheabove
Answer:
dpage27.
10)SupposethatBritainpegsthepoundtogoldatsixpoundsperounce,whereastheexchangeratebetweenpoundsandU.S.dollarsis$5=£1.WhatshouldanounceofgoldbeworthinU.S.dollars?
a)$29.40
b)$30.00
c)$0.83
d)$1.20
Answer:
b)
Rationale:
1oz.Au=£6and£1=$5so£6=$30=1oz.Au
11)Underthegoldstandard,internationalimbalancesofpaymentwillbecorrectedautomaticallyunderthe
a)GreshamExchangeRateregime
b)EuropeanMonetarySystem
c)Price-specie-flowmechanism
d)BrettonWoodsAccord
Answer:
c
InterwarPeriod
12)DuringtheperiodbetweenWorldWarIandWorldWarII
a)ThemajorEuropeanpowersandtheU.S.returnedtothegoldstandardandfixedexchangerates.
b)WhilemostcountriesabandonedthegoldstandardduringWorldWarI,internationaltradeandinvestmentflourishedduringtheinterwarperiodunderacoherentinternationalmonetarysystem.
c)TheU.S.dollaremergedasthedominantworldcurrency,graduallyreplacingtheBritishpoundfortherole.
d)Noneoftheabove.
Answer:
c29.
13)DuringtheperiodbetweenWorldWarIandWorldWarII,manycentralbanksfollowedapolicyofsterilizationofgold
a)Thisrestrictedtherateofgrowthinthesupplyofgold
b)Bymatchinginflowsandoutflowsofgoldrespectivelywithreductionsandincreasesindomesticmoneyandcredit.
c)Bymatchinginflowsandoutflowsofgoldrespectivelywithincreasesandreductionsindomesticmoneyandcredit.
d)Noneoftheabove.
Answer:
bpage29.
14)AttheoutbreakofWorldWarI
a)MajorcountriessuchasGreatBritain,France,GermanyandRussiasuspendedredemptionofbanknotesingold
b)MajorcountriessuchasGreatBritain,France,GermanyandRussiaimposedembargoesontheexportofgold
c)Theclassicalgoldstandardwasabandoned
d)Alloftheabove.
Answer:
bpage28
BrettonWoodsSystem:
1945-1972
15)UndertheBrettonWoodssystem
a)therewasanexplicitsetofrulesabouttheconductofinternationalmonetarypolicies
b)eachcountrywasresponsibleformaintainingitsexchangeratewithin1percentoftheadoptedparvaluebybuyingorsellingforeignexchangesasnecessary
c)theU.S.dollarwastheonlycurrencythatwasfullyconvertibletogold
d)alloftheabove
Answer:
d.
16)UndertheBrettonWoodssystem:
a)Eachcountryestablishedaparvalueforitscurrencyinrelationtothedollar.
b)TheU.S.dollarwaspeggedtogoldat$35perounce.
c)eachcountrywasresponsibleformaintainingitsexchangeratewithin1percentoftheadoptedparvaluebybuyingorsellingforeignexchangesasnecessary
d)alloftheabove
Answer:
d.
17)SincetheSDRisa“portfolio”ofcurrencies
a)ItsvaluetendstobemorestablethanthevalueofanyoftheindividualcurrenciesincludedintheSDR
b)ItsvaluetendstobelessstablethanthevalueofanyoftheindividualcurrenciesincludedintheSDR
c)ItsvaluetendstobeasstableastheaverageoftheindividualcurrenciesincludedintheSDR
d)Noneoftheabove
Answer:
a)
Rationale:
whilethisisinthebookonpage31,manystudentstendtomissthisone.Anyportfolioislessvolatilethantheaveragevolatilityoftheindividualsecurities,aslongasatleasttwosecuritiesarenotperfectlypositivelycorrelated.Thisiscertainlythecasewithcurrencies.
18)SpecialDrawingRights(SDR)are:
a)anartificialinternationalreserveallottedtothemembersoftheInternationalMonetaryFund(IMF),whocanthenuseitfortransactionsamongthemselvesorwiththeIMF
b)a“portfolio”ofcurrencies,anditsvaluetendstobemorestablethanthecurrenciesthatitiscomprisedof
c)usedinadditiontogoldandforeignexchanges,tomakeinternationalpayments
d)alloftheabove
Answer:
d-p.32
TheFlexibleExchangeRateSystem
19)Goldwasofficiallyabandonedasaninternationalreserveasset:
a)IntheJanuary1976JamaicaAgreement
b)Inthe1971SmithsonianAgreement
c)Inthe1944BrettonWoodsAgreement
d)Noneoftheabove
Answer:
a
20)FollowingthedemiseoftheBrettonWoodssystem,theIMF
a)Createdanewroleforitself,providingloansto
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