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Chapter 3 - Textbook Notes.docx

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Management Core
MGCR 382
Nicholas Matziorinis

Chapter 3 Notes – Final Exam The International Monetary System The gold standard: each country set the rate at which its currency united could be converted to a weight of gold. Each government of each country on the gold standard agreed to buy or sell gold on demand with anyone at its own fixed parity rate, the value of each individual currency at terms of gold, and therefore exchange rates between currencies, was fixed. - WW1 caused main trading nations to suspend operation of the gold standard. Selling short: a speculation technique in which an individual speculator sells an asset such as a currency to another party for delivering at a later dater. The speculator, however, does not yet own the asset, and expects the price of the asset to fall by the date when the asset must be purchased in the open market by the speculator for delivery. -modified gold standard was adopted in 1934 --- U.S. Treasury traded gold only with foreign central banks, not private citizens. From 1934 to the end of WW2, exchange rates were theoretically determined by each currency’s value in terms of gold. -After WW2, allied power created two new systems: the International Monetary Fund and the World Bank. - IMF aids countries with balance of payments and exchange rate problems. - World Bank helps fund postwar reconstruction and has supported general economic development. IMF: established to render temporary assistance to member countries trying to defend their currencies against cyclical, seasonal, or random occurrences. Also assists countries having structural trade problems if they promise to take adequate steps to correct their problems. Loans + advice. - Under the original provisions of the Bretton Woods Agreement, all countries fixed the values of their currencies in terms of gold but were not required to exchange their currencies for gold. - Gold-Exchange Standard: - dollar contervible to gold ---- each country established its exchange rate vis-a-vis the dollar, then calculated the gold par value of its currency to create the desired dollar exchange rate. Participating countries agreed to try to main the value of their currencies within 1% of par by buying or selling foreign exchange or gold as needed. - Special Drawing Right: an international reserve asset created by the IMF to supplement existing foreign exchange reserves . Serves as a unit of account for the IMF and other international and regional organizations, and is also the base against which some countries the echange rate for their currencies. Currently the weighted average of four major currencies: US dollar, euro, yen, and British pound. - August 15, 1971 – Nixon suspended official purchases or sales of gold by the US treasury. IMF Exchange Rate Regime Classifications 1. Exchange arrangements with no separate legal tender: the currency of another country circulates as the sole legal tender or the member belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. 2. Currency board arrangements: a monetary regime based on an implicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. 3. Other conventional fix peg arrangements:? The country pegs its currency at a fixed rate to a major currency or a basket of currency, where the exchange rate fluctuates within a narrow margin or at most plus or minus 1 % around a central rate. 4. Pegged exchange rates within horizontal bands: the value of the currency is maintained within margins of fluctuation around a formal or de facto dixed peg that are wide than /./..//./// sEEEE PAGE 66 - Most prominent example of a rigidly fixed system: euro  single currency for its member countries. However, the euro itself is an independently floating currency against all other currencies. o EGs panama, Ecuador – use US dollar o Central African Franc Zone o Easter Caribbean Currency Union Why ch
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