Module 8 - the international monetary system & financial forces

Functions of money

1. Medium of Exchange

2. Store of Value

3. Unit of Value

Why is gold trusted as a common currency?

Due to its scarcity and level of purity

Gold Standard

A monetary system which defines its value of currency by a fix amount of gold

How does money represent gold?

Money is a receipt of gold you have

Pro of the Gold Standard

Money supply is limited to the amount of gold in hand, keep the inflation low

Con of the Gold Standard

A government cannot increase the money supply to ward off recession

Bretton Woods System (Gold Exchange Standard)

US government guarantees that 1 ounce of gold = $35 USD and other currencies are tied to USD

International Monetary Fund (IMF)

agency created by the UN ensuring financial stability and reducing poverty

How did the Bretton Wood System change international currency

this system tied gold to the USD, making the dollar the mean of international travel

Special Drawing Rights (SDR)

a virtual currency, consists of USD, British Pound, Japanese Yan, Chinese RMB and Euro

Central Reserve Conflict

US dollar serves as the national currency and central reserve asset so if US issues more currency, it will result in less value for other country's reserve

Floating Currency Exchange Rate System

1973, FX was established to trade based on supply and demand

Hard Pegs

fixed exchange rate

Soft Pegs

within a range, more developing countries use this system

floating

free trade used by more developed countries

Other types of "currencies"

Bitcoin, frequent flyer mileage, credit card points

Bank for International Settlements (BIS)

International Organization of Central Banks, to build cooperation in order to foster mnetary and financial stability

Foreign Exchange Market

like the stock market, currency value goes up and down, each country is like a company

Vehicle currency

currency used for international trade

Intervention currency

used by the central bank to intervene in the foreign currency exchange market

Causes of exchange rate movement

1. supply/demand

2. monetary policies

3. fiscal policies

Monetary policies

amount of money in circulation

Fiscal policies

collecting and spending of money by the government

Convertible currencies

can be exchanged for other currencies without restrictions

Nonconvertible currencies

value is arbitrarily fixed, the exchange rate is higher than open market

Limit the amount that can be transferred per person

nonconvertible currencies

Taxation

US has the highest tax rate (27%) while world average is (20%)

Income tax

corporate income, personal income

withholding tax

withheld from nonresidents

Inflation rate

inflation rate is measured by Consumer Price Index (CPI) based on a basket of goods

With higher inflation rate

banks have to offer higher interest rate to draw deposit

Balance of Payments (BOP)

record of a country's transactions with the rest of the world

Debit

funds flowing out (when buying something from other countries)

credit

funds coming in (when selling something to other countries)

BOP Current Account

Net changes in exporting and imports of goods and services

BOP Capital Account

Net changes in a nations international assets and liabilities