Chapter 11: The International Monetary System

International Business

What is the international monetary system?

The institutional arrangements countries adopt to govern exchange rates.

What is a floating exchange rate system?

A system in which the foreign exchange market determines the relative value of a currency.

Which four major currencies are free to float against each other?

The U.S. dollar, EU euro, Japanese yen, and British pound.

What is another name for a managed float system?

A dirty-float system.

What is a fixed exchange rate system?

A system in which the values of currencies are fixed against each other at a mutually agreed-on exchange rate.

What was the gold standard?

A system where currencies were pegged to gold and governments guaranteed convertibility into gold.

What is the gold par value?

The amount of currency needed to purchase one ounce of gold.

What economic condition did the gold standard seek to achieve?

Balance-of-trade equilibrium.

What is balance-of-trade equilibrium?

When the income a nation's residents earn from exports equals the money paid for imports.

When was the gold standard abandoned?

1914.

What was the condition of the gold standard by the start of World War II in 1939?

It was in tatters.

What was one major institution created under the Bretton Woods system?

The International Monetary Fund (IMF).

What is the primary role of the IMF?

Maintaining order in the international monetary system.

Who would police the system of fixed exchange rates?

The IMF.

What was the second major institution created at Bretton Woods?

The World Bank.

What is the purpose of the World Bank?

To promote general economic development.

What was the World Bank's original mission?

To help reconstruct the war-torn economies of Europe.

What did the World Bank later focus on?

Lending to third-world nations for development.

What did President Nixon announce regarding the U.S. dollar?

The dollar was no longer convertible into gold.

What happened to gold as a reserve asset after Nixon's announcement?

Gold was abandoned as a reserve asset.

What were IMF members allowed to do with their gold reserves?

Sell their own gold reserves at market prices.

How do developed countries generally finance deficits today?

By borrowing private money rather than drawing on IMF funds.

Why are IMF funds used less frequently by developed nations?

Because they can often obtain financing through private capital markets.

What is moral hazard?

When people behave recklessly because they know they will be saved if things go wrong.

Why is moral hazard a concern in international finance?

Countries, banks, or investors may take excessive risks if they expect to receive financial assistance during a crisis.