The international monetary system refers to the institutional arrangements that govern exchange rates.
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A pegged exchange rate means the value of a currency is fixed relative to a reference currency.
A pegged exchange rate means the value of the currency is fixed relative to a reference currency, such as the U.S. dollar, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.
A dirty float occurs when a country uses pegged exchange rates to value its currency.
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Countries, while not adopting a formal pegged rate, try to hold the value of their currency within some range against an important reference currency such as the U.S. dollar, or a "basket" of currencies. This is often referred to as a dirty float.
The gold standard called for fixed exchange rates against the U.S. dollar.
Pegging currencies to gold and guaranteeing convertibility is known as the gold standard. By 1880, most of the world's major trading nations, including Great Britain, Germany, Japan, and the United States, had adopted the gold standard.
The amount of a currency needed to purchase one ounce of gold was referred to as the gold par value under the gold standard.
Under the gold standard, the amount of a currency needed to purchase one ounce of gold was referred to as the gold par value.
A country is said to be in balance-of-trade equilibrium when it produces all the goods needed for domestic consumption.
A country is said to be in balance-of-trade equilibrium when the income its residents earn from exports is equal to the money its residents pay to other countries for imports (the current account of its balance of payments is in balance).
The agreement reached at Bretton Woods established the International Monetary Fund (IMF) and the World Bank.
The agreement reached at Bretton Woods established two multinational institutions— the International Monetary Fund (IMF) and the World Bank.
Implementing a fixed exchange rate regime increases the price inflation in countries.
A fixed exchange rate regime imposes monetary discipline on countries, thereby curtailing price inflation.
World Bank offers low-interest loans to risky customers whose credit rating is often poor.
World Bank offers low-interest loans to risky customers whose credit rating is often poor, such as the governments of underdeveloped nations.
IDA loans receive direct funding from the World Bank.
One of the funding schemes of the World Bank is overseen by the International Development Association (IDA), an arm of the bank created in 1960. Resources to fund IDA loans are raised through subscriptions from wealthy members such as the United States, Japan, and Germany.
The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the U.S. dollar.
U.S. dollar was the only currency that could be converted into gold in the fixed exchange rate system established at Bretton Woods. As the currency that served as the reference point for all others, the dollar occupied a central place in the system. The system failed when its key currency U.S. dollar faced speculative pressure.
Gold was declared as the formal reserve asset in the Jamaica agreement of 1976.
In the Jamaica agreement, gold was abandoned as a reserve asset. The IMF returned its gold reserves to members at the current market price, placing the proceeds in a trust fund to help poor nations.
IMF members were permitted to sell their own gold reserves at the market price in the Jamaica agreement.
In the Jamaica agreement, gold was abandoned as a reserve asset. IMF also permitted its members to sell their own gold reserves at the market price.
The value of U.S dollar increased between 1980 and 1985 despite running a growing trade deficit.
The rise in the value of the dollar between 1980 and 1985 occurred when the United States was running a large and growing trade deficit, importing substantially more than it exported. A number of favorable factors overcame the unfavorable effect of a trade deficit.
The rise in the value of the dollar gave U.S goods a competitive advantage over others between 1985 and 1988.
Rise in dollar will make U.S. goods less competitive. The rise in the dollar priced U.S. goods out of foreign markets and made imports relatively cheap.
Market forces have produced a stable dollar exchange rate under a floating exchange rate regime.
Under a floating exchange rate regime, market forces have produced a volatile dollar exchange rate. Governments have sometimes responded by intervening in the market—buying and selling dollars—in an attempt to limit the market's volatility and to correct what they see as overvaluation or potential undervaluation of the dollar.
Advocates of a floating exchange rate regime argue that removal of the obligation to maintain exchange rate parity would restore monetary control to a government.
The monetary autonomy argument is supported by the advocates of fixed exchange rates.
Advocates of floating rates argue that each country should be allowed to choose its own inflation rate. This is called the monetary autonomy argument. Advocates of fixed rates argue against this.
Fixed exchange rates lead to speculation and uncertainty in the value of currencies.
Speculation can make exchange rates volatile in the floating exchange rate system. Speculation also adds to the uncertainty surrounding future currency movements that characterizes floating exchange rate regimes. A fixed exchange rate eliminates such uncertainty.
Supporters of floating exchange rates claim that trade deficits are determined by the balance between savings and investment in a country.
Those in favor of floating exchange rates argue that floating rates help adjust trade imbalances. Critics of floating rates claim that trade deficits are determined by the balance between savings and investment in a country, not by the external value of its currency.
Exchange rates are determined by the government under a pure "free float" system.
Under a pure "free float" system, exchange rates are determined by market forces.
A country valuates its currency without attaching it to a reference currency under the pegged exchange rate regime.
Under a pegged exchange rate regime, a country will peg the value of its currency to that of a major currency so that, for example, as the U.S. dollar rises in value, its own currency rises too.
The great virtue claimed for a pegged exchange rate is that it imposes monetary discipline on a country and leads to low inflation.
As with a full fixed exchange rate regime, the great virtue claimed for a pegged exchange rate is that it imposes monetary discipline on a country and leads to low inflation.
Adopting a pegged exchange rate regime increases the inflationary pressures in a country.
Evidence shows that adopting a pegged exchange rate regime moderates inflationary pressures in a country.
A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate.
A country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To make this commitment credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100 percent of the domestic currency issued.
A currency board system limits the ability of the government to print money and, thereby, create inflationary pressures.
The currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back it. This limits the ability of the government to print money and, thereby, create inflationary pressures.
27. Interest rates adjust automatically under a strict currency board system.
Under a strict currency board system, interest rates adjust automatically. If investors want to switch out of domestic currency into, for example, U.S. dollars, the supply of domestic currency will shrink. This will cause interest rates to rise until it eventually becomes attractive for investors to hold the local currency again.
Currencies of countries with currency boards will become uncompetitive and overvalued if local inflation rates are lower than the inflation rate in the country to which the currency is pegged.
If local inflation rates remain higher than the inflation rate in the country to which the currency is pegged, the currencies of countries with currency boards can become uncompetitive and overvalued.
The IMF's original function was to provide a pool of money from which members could borrow in the short term.
The IMF's original function was to provide a pool of money from which members could borrow, short term, to adjust their balance-of-payments position and maintain their exchange rate.
A currency crisis occurs when investors lose confidence in a country's banking system.
A currency crisis occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates to defend the prevailing exchange rate.
A foreign debt crisis is a situation in which a country cannot service its foreign debt obligations.
A foreign debt crisis is a situation in which a country cannot service its foreign debt obligations, whether private-sector or government debt.
The IMF made pegging Mexican peso to the dollar, a condition for lending money to the Mexican government in the 1980s.
The Mexican peso had been pegged to the dollar since the early 1980s when the International Monetary Fund made it a condition for lending money to the Mexican government.
Government projects were a factor behind the investment boom in most Southeast Asian economies.
An added factor behind the investment boom in most Southeast Asian economies was the government. In many cases, the governments had embarked on huge infrastructure projects.
The quality of investments declined significantly in the Asian countries during the 1990s.
Volume of investments increased in the Asian countries during the 1990s. As the volume of investments ballooned, often at the bequest of national governments, the quality of many of these investments declined significantly.
In the 1990s, most of the borrowing by the companies who invested in Asian countries had been in local currencies.
The companies that had made the investments in Asia, in 1990s, were under huge debt burdens and they were finding it difficult to service. Much of the borrowing had been in U.S. dollars, as opposed to local currencies.
Most of the loans issued by the IMF are unconditional loans.
All IMF loan packages come with conditions attached. Until very recently, the IMF has insisted on a combination of tight macroeconomic policies, including cuts in public spending, higher interest rates, and tight monetary policy.
Moral hazard arises when people behave recklessly because they know they will be saved if things go wrong.
The Asian economic crisis was caused by high inflation rates.
The Asian economic crisis and the global financial of 2008-2009 crisis were caused not by high inflation rates, but by excessive debt.
The current system of foreign exchange is a mixed system of government intervention and speculative activity.
The current system of foreign exchange is a mixed system in which a combination of government intervention and speculative activity can drive the foreign exchange market.
40. Firms should not utilize the forward exchange market when they are faced with uncertainty about the future value of currencies.
Faced with uncertainty about the future value of currencies, firms can utilize the forward exchange market.
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