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Final exam review for ECO 1502

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Chapter 10The Global Monetary SystemTurkeys 18th IMF Program p 32224Meaning of theinternational monetary systempromotes price stability lowering national debt regulates poor countries only Institutional arrangements countries adopt to govern exchange ratesFloating exchange rate US dollar Yen Pounds Euro Flexible exchange rate A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demandPegged exchange rate Currency value is fixed relative to a reference currency Usually pegged to US or Euro Ex Canadian dollar pegged to US dollarDirtyfloat system governor of national central bank interferes when the dollar goes crazyFixed exchange rate A system which the exchange rate for converting one currency into another is fixed EX during WW2 some European states had the same fixed currency through the European Monetary SystemThe Gold Standard p 327328 country prices currency relative to gold pegging Practice of pegging currencies to gold and guaranteeing convertibility Ex 35 dollars for an ounce of gold Was claimed that the gold standard contained a powerful mechanism for achieving balance of trade equilibrium by all countries When income that people earn from exports is the same as money paid for imports The Bretton Woods System p 329 At height of WW2 44 countries met in the US to design a new international monetary system Since gold standard and depression was over with they wanted to create an economic order that would facilitate postwar economic growth They agreed to have a world filled with only fixed exchange rates that would be pushed by the IMF They created World Bank to promote general economic development and IMF maintain order in the international monetary systemThe Role of the IMF p 329 fixed exchange rate imposes discipline First it brings stability to the world trade environment Second fixed exchange rate imposes monetary discipline on countries thus restricting inflation However was recognized that this policy was too inflexible It Would probably break down like the gold standard The IMF in the beginning loaned money to reduce pressure during the short periods of deficits The Role of the World Bank p 330 International bank of reconstruction and development Was initially used to help countries affect by WW In Europe Composed of two schemes IBRDmoney raised through bond sales in international capital
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