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Chapter 7.docx

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Chapter 7The International Monetary System and the Balance of Payments The International Monetary System Exists because most countries have their own currenciesEstablishes the rules by which countries value and exchange their currencies Balance of Payments BOP Accounting System Records international transactions and supplies vital information about the health of a national economy and likely changes in its fiscal and monetary policies Can be used to detect signs of trouble that could eventually lead to government trade restrictions higher interest rates accelerated inflation and general changes in the cost of doing business in any given countryHistory of the International Monetary SystemThe Gold Standard Under the Gold standard countries agree to buy or sell their paper currencies in exchange for gold This effectively created a fixed exchange rate system Exchange rate is the price of one currency in terms of a second currency Fixed exchange rate system when the price of a given currency does not change relative to each other currency From 1821 until the end of WWI in 1918 the most important currency in international commerce was the British pound sterling Therefore the international monetary system during this time is called the Sterlingbased Gold StandardThe economic pressures of war caused countries to suspend their pledges to buy or sell gold at their currencies par valuesThe Bretton Woods EraConference that resulted in the creation of two new international organizations that would assist in rebuilding the world economy and the international monetary system 1 The International Bank for Reconstruction and Development 2 The International Monetary FundThe International Bank for Reconstruction and Development IBRDis the official name of the WORLD BANK initial goal was to help finance reconstruction of the wartorn European economies After it accomplished this task it adopted a new mission to build the economies of the worlds developing countries
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