Week 2 International Management

1. What was the Classical Gold Standard?

The Classical Gold Standard was an international monetary system used from approximately 1876 to 1913. Each country defined its currency as a specific weight of gold.

2. How long has gold been used as a medium of exchange?

Gold has been used as a medium of exchange since approximately 3,000 BC.

3. What were the “rules of the game” under the gold standard?

Each country established the rate at which its currency could be converted into a particular weight of gold. This made currency exchange rates effectively fixed.

4. Why was the Classical Gold Standard called a sterling-based gold standard?

The United Kingdom was the dominant economic and military power, and most international transactions were conducted in either gold or the British pound sterling.

5. How did the gold standard limit expansionary monetary policy?

A government could expand its money supply only if it had enough gold to support the additional currency.

6. What brought the Classical Gold Standard to an end?

The outbreak of World War I interrupted the free international movement of gold.

7. How is an exchange rate calculated under the gold standard?

The gold price in one currency is divided by the gold price in the other currency.

8. If gold costs £4 per ounce in the United Kingdom and $12 per ounce in the United States, what is the exchange rate?

The exchange rate is $12 divided by £4, which equals $3 per British pound.

9. What were the main benefits of the gold standard?

It promoted long-run price stability and helped international trade prosper.

10. What was a major economic disadvantage of the gold standard?

It restricted the use of expansionary monetary policy to fight unemployment because money-supply growth depended on additional gold.

11. What events ultimately doomed the gold standard?

World War I, which lasted from 1914 to 1918, and the worldwide Great Depression, which began in 1929.

12. What did the United Kingdom do in September 1931?

The United Kingdom allowed the British pound to float.

13. What happened to currencies during the interwar period?

Currencies fluctuated over wide ranges relative to gold and one another. Speculators increased volatility by selling short currencies they considered weak.

14. How did the United States modify the gold standard in 1934?

The United States devalued the dollar by changing its official gold price from $20.67 to $35 per ounce.

15. What happened to currency convertibility during World War II?

Many major trading currencies lost their convertibility. The U.S. dollar was the only major trading currency that remained convertible.

16. What was the Bretton Woods Agreement?

It was a 1944 agreement created by the Allied Powers at Bretton Woods, New Hampshire, to establish a postwar international monetary system based on the U.S. dollar.

17. What two major institutions were created under Bretton Woods?

The International Monetary Fund, or IMF, and the World Bank.

18. How did the Bretton Woods dollar-based gold-exchange standard operate?

Each currency established a par value against the U.S. dollar, while the dollar was pegged to gold at $35 per ounce.

19. What exchange-rate range did countries have to maintain under Bretton Woods?

Each country had to maintain its exchange rate within plus or minus 1 percent of its adopted par value by buying or selling foreign exchange.

20. What was the purpose of the IMF?

The IMF helped countries defend their currencies against temporary cyclical, seasonal, or random pressures. It also assisted countries with structural trade problems if they agreed to corrective measures.

21. What was the original purpose of the World Bank?

The International Bank for Reconstruction and Development, or World Bank, originally funded postwar reconstruction and later supported general economic development.

22. What is the Triffin Paradox?

The reserve-currency country must run balance-of-payments deficits to provide the world with reserves. However, large and persistent deficits eventually undermine confidence in the reserve currency.

23. What action did President Nixon take in August 1971?

The United States suspended the convertibility of official U.S. dollar reserves into gold, contributing to the collapse of Bretton Woods.

24. What are Special Drawing Rights?

Special Drawing Rights, or SDRs, are international reserve assets created by the IMF in 1969 to supplement inadequate supplies of gold and U.S. dollars.

25. What currencies and weights are included in the SDR basket presented in the PowerPoint?

The basket contains the U.S. dollar at 43.38 percent, euro at 29.31 percent, Chinese RMB at 12.28 percent, Japanese yen at 7.59 percent, and British pound at 7.44 percent. The basket is reevaluated every five years.

26. What happened to exchange rates after March 1973?

Exchange rates became more volatile and less predictable as the system shifted away from Bretton Woods fixed rates.

27. What was the Jamaica Agreement of 1976?

It formally accepted flexible exchange rates, permitted central-bank intervention to reduce volatility, and abandoned gold as an international reserve asset.

28. What was the Plaza Accord of 1985?

The G-5 countries agreed to coordinate intervention to produce a controlled decline in the U.S. dollar and appreciation of major currencies against it.

29. Why had the dollar appreciated rapidly from 1980 through 1984?

High U.S. real interest rates attracted foreign investment needed to finance U.S. budget and balance-of-payments deficits.

30. What was the result of the Plaza Accord?

Within two years, the dollar fell approximately 46 percent against the Deutsche mark and 50 percent against the Japanese yen. By the end of 1987, it had fallen about 54 percent against both currencies from its February 1985 peak.

31. What was the Louvre Accord of 1987?

The G-6 countries agreed to cooperate to stop the dollar’s continued decline and achieve greater exchange-rate and macroeconomic stability.

32. How does the IMF classify exchange-rate regimes?

The IMF uses actual observed behavior, called de facto behavior, rather than relying only on official government statements.

33. What are the three main IMF exchange-rate groups?

Hard pegs, soft pegs, and floating arrangements.

34. What is an arrangement with no separate legal tender?

Another country’s currency serves as the sole legal tender, or several countries share the same currency through a monetary union.

35. What is a currency-board arrangement?

A country legally commits to exchanging its domestic currency for a foreign currency at a fixed rate. Domestic currency is issued only when it is fully backed by foreign assets.

36. What is a conventional pegged arrangement?

A country formally pegs its currency to another currency or currency basket and maintains the parity through intervention. The rate normally stays within plus or minus 1 percent of the central rate.

37. What is a stabilized arrangement?

The spot exchange rate remains within a 2 percent margin for at least six months because of official action and does not qualify as floating.

38. What is a crawling peg?

The currency is adjusted gradually at a fixed rate or according to indicators such as inflation differentials.

39. What is a crawl-like arrangement?

The exchange rate stays within a 2 percent margin of a statistically defined trend for at least six months.

40. What is a pegged exchange rate within horizontal bands?

The currency is maintained around a central value but is permitted to move within an established exchange-rate band, such as the ERM II system.

41. What is an “other managed arrangement”?

It is a residual category for systems that do not meet the requirements of another classification or that frequently change policies.

42. What is a floating exchange-rate arrangement?

The exchange rate is largely market determined. Intervention may occur to moderate movements, but it does not target a specific exchange rate.

43. What is a free-floating exchange-rate arrangement?

Intervention occurs only exceptionally, with no more than three interventions in six months and none lasting longer than three business days.

44. How many IMF exchange-rate categories are genuinely floating?

Only the final two categories, floating and free floating, are substantially market determined.

45. What percentage of 190 IMF members used floating arrangements as of April 30, 2024?

Approximately 32.5 percent.

46. What economic priorities influence a country’s choice of exchange-rate regime?

Inflation, unemployment, interest rates, trade balances, and economic growth.

47. What are the main advantages of fixed exchange rates?

They create stability in international prices and can discourage inflation.

48. What are the main disadvantages of fixed exchange rates?

Central banks need large reserves of gold and hard currency, and the fixed rate may become inconsistent with economic fundamentals.

49. What is the Impossible Trinity?

The principle that a country cannot simultaneously achieve exchange-rate stability, full financial integration, and monetary independence.

50. What does a country sacrifice under a pure floating regime?

It can have monetary independence and financial integration, but it sacrifices exchange-rate stability.

51. What does a country sacrifice when it uses strict capital controls?

It can maintain monetary independence and a stable exchange rate, but it sacrifices integration with global financial markets.

52. How does a currency board control the money supply?

A unit of domestic currency cannot enter the economy unless an additional unit of foreign-exchange reserves is obtained first.

53. What is the Hong Kong currency-board example?

The Hong Kong Monetary Authority has operated a currency-board system since October 17, 1983, with a rate of approximately HK$7.8 per U.S. dollar.

54. What happened to Argentina’s currency board?

Argentina established it in 1991 but ended it in 2002 during major economic and political turmoil.

55. What is dollarization?

Dollarization occurs when a country uses the U.S. dollar as its official currency. The term can also refer more broadly to adopting any foreign currency.

56. Which countries are examples of dollarization?

Ecuador adopted the dollar in 2000, El Salvador in 2001, and Panama in 1904. Kosovo uses the euro.

57. What are the main advantages of dollarization?

It can promote fiscal discipline, financial stability, and lower inflation while reducing dependence on domestic policymakers.

58. What is a Eurocurrency?

A Eurocurrency is the domestic currency of one country deposited in a second country, such as Eurodollars or Euroyen.

59. What purposes do Eurocurrency markets serve?

They give corporations a convenient place to hold excess liquidity and provide short-term loans for working capital, export financing, and import financing.

60. What was LIBOR?

The London Interbank Offered Rate was a daily reference rate based on unsecured borrowing rates among banks in the London wholesale market.

61. How was LIBOR used?

It appeared in loan agreements, standard interest-rate quotations, swaps, forward-rate agreements, and financial derivatives.

62. What currencies and maturities did LIBOR cover?

It covered seven maturities, from overnight to 12 months, in the British pound, U.S. dollar, euro, Japanese yen, and Swiss franc.

63. What are Euribor, TIBOR, HIBOR, SIBOR, and SHIBOR?

They are interbank rates associated with the euro area, Tokyo, Hong Kong, Singapore, and Shanghai.

64. What is the TED spread?

It is the difference between the three-month Treasury bill rate and the three-month LIBOR rate. A high spread indicates greater perceived financial and commercial-bank credit risk.

65. What was the LIBOR scandal?

A 2012 investigation revealed that several banks had manipulated LIBOR for profit. Regulators imposed more than $6 billion in fines.

66. Why was LIBOR replaced?

It relied on relatively few transactions and substantial expert judgment. Even its most active three-month maturity represented less than $1 billion in daily transactions.

67. What replacement rates were recommended for LIBOR?

SOFR for the United States, SONIA for the United Kingdom, ESTER for the euro area, TONAR for Japan, and SARON for Switzerland.

68. What is SOFR?

The Secured Overnight Financing Rate is based on approximately $1 trillion in daily overnight repo transactions. Publication began in April 2018, and representative U.S. dollar LIBOR ended after June 30, 2023.

69. How did China manage the RMB before 2005?

The RMB was historically pegged to the dollar. It moved from approximately 1.50 yuan per dollar in 1980 to 8.73 in 1994 and was maintained near 8.27 from 1997 to 2005.

70. What happened to the RMB on July 21, 2005?

China lifted the peg and revalued the RMB to 8.11 yuan per dollar. It later appreciated to approximately 6.8 yuan per dollar.

71. What policy did China adopt on June 19, 2010?

China adopted a managed floating exchange rate based on market supply and demand, with reference to a basket of foreign currencies.

72. What caused the RMB to reach 6.0487 yuan per dollar in January 2014?

China’s strong economic growth helped the RMB reach an 18-year high. It had gained more than 11 percent since 2010 and 33 percent since 2005.

73. What caused the RMB crisis during 2015 and 2016?

China’s falling stock market and economic concerns encouraged investors to move funds abroad. Capital outflows caused depreciation, which encouraged further outflows.

74. How did China attempt to defend the RMB in 2015 and 2016?

The government bought RMB, reducing its foreign-exchange reserves. The currency still fell to approximately 6.9582 yuan per dollar by December 18, 2016.

75. What happened to the RMB during 2017 and 2018?

It appreciated almost 10 percent in 2017 but declined more than 10 percent during the 2018 U.S.-China trade conflict.

76. How did the PBOC support the RMB in 2018?

It issued RMB 20 billion of bills in Hong Kong to absorb offshore yuan, raise offshore interest rates, and increase the cost of shorting the currency.

77. What happened to the RMB from 2019 through 2021?

It weakened beyond seven yuan per dollar in August 2019, strengthened after the January 2020 trade agreement, weakened during the coronavirus slowdown, and appreciated in 2021 because of strong exports and attractive Chinese bond returns.

78. What happened to the RMB from 2023 through 2026?

It remained weak during 2023 through 2025 because of Chinese economic weakness and U.S. interest-rate increases. It strengthened to approximately 6.74 yuan per dollar by August 2026 because of China’s trade surplus and a weaker U.S. dollar.

79. What is the difference between CNY and CNH?

CNY is the onshore RMB market in mainland China. CNH is the offshore RMB market that developed primarily in Hong Kong.

80. What is the difference between Panda bonds and Dim Sum bonds?

Panda bonds are issued by foreign companies in onshore CNY. Dim Sum bonds are issued in offshore CNH, commonly in Hong Kong.

81. What did the Maastricht Treaty establish?

The December 1991 treaty created a timetable for replacing national European currencies with the euro and establishing the European Economic and Monetary Union.

82. What was the European Currency Unit?

The ECU was a weighted basket of European Union currencies adopted by the European Monetary System in 1979.

83. What were the Maastricht convergence criteria?

Budget deficits below 3 percent of GDP, public debt below 60 percent of GDP, inflation no more than 1.5 percentage points above the lowest-inflation members, and long-term interest rates no more than 2 percentage points above the average of the three members with the lowest rates.

84. What is the European Central Bank?

The ECB is the euro area’s central bank and is located in Frankfurt, Germany.

85. Which countries initially adopted the euro in 1999?

Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

86. Which countries joined the euro later?

Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia, Lithuania, Croatia, and, according to the presentation, Bulgaria in 2026. This brought the euro area to 21 members.

87. What are the major benefits and costs of the euro?

Benefits include lower transaction costs, less currency risk, price transparency, increased competition, and easier access to capital. Costs include losing the ability to devalue the national currency or independently change interest rates and the money supply.

88. What were the major events of the European sovereign-debt crisis?

Greece revealed approximately €300 billion in debt in 2009 and received three bailouts. Ireland received €85 billion, Portugal received €78 billion, and the European Stability Mechanism was established with about €500 billion. Greece exited its final bailout program in August 2018 after receiving roughly $330 billion in loans.

89. What underlying problems made the euro-area debt crisis worse?

Debt rules lacked enforcement, Greece manipulated borrowing statistics, members lost independent exchange-rate adjustment, southern European wages rose faster than German wages, private debt increased, and trade deficits reduced competitiveness. Greece’s economy declined from about $312 billion in 2007 to $218 billion in 2018.

90. How has the euro’s value changed, and what tradeoffs will future monetary systems face?

The euro became the world’s second-largest reserve and traded currency. It reached approximately $1.5990 in July 2008, weakened during the sovereign-debt crisis, strengthened by about 10 percent in 2025, and stood near $1.1535 on August 13, 2026. Future systems must balance rules against discretion and international cooperation against national independence.