Deck 20: International Monetary Arrangements

Question 1

The gold standard operated from approximately:

A) 1776-1861.
B) 1861-1946.
C) 1870-1914.
D) 1946-1973.

Answer 1

1870-1914.

Question 2

Which of the following was a period for which there was no official international monetary system?

A) 1870-1914
B) 1914-1946
C) 1946-1971
D) 1980-1996

Answer 2

1980-1996

Question 3

Explain how a gold standard system would automatically correct an imbalance in the balance of payments.

Answer 3

The gold standard was a system that automatically managed a country's money supply. If a country had a balance of payments deficit at the current fixed exchange rate, gold would flow out of the country. This outflow of gold would cause the money supply to automatically decline and the change in the money supply would set in motion forces that would tend to briskly correct the balance of payments deficit. The reverse would occur when a country had a balance of payments surplus.

Question 4

A gold standard would tend to correct the cause of a balance of payments deficit by creating a recession. Show why this statement is true.

Question 5

Discuss the costs and benefits for an independent country of a gold standard.

Question 6

Suppose that a country participating in the Bretton Woods system was experiencing a recession and a balance of payments deficit. Describe the actions that would have been necessary to correct the external imbalance.

Question 7

The gold standard was symmetric in terms of how countries dealt with balance of payments deficits and surpluses, but the Bretton Woods system was asymmetric in this regard. Explain what this statement means.

Question 8

Describe the history of the formation of the Euro.

Question 9

Explain why a clean float is optimal in the sense of allowing a country to focus on internal balance without much concern about external balance.

Question 10

The cost of a clean float is the dire consequences such a policy may have on certain sectors of the economy. List these sectors and describe these consequences.

Question 11

Describe how a country could peg its real exchange rate.

Question 12

How do volatile exchange rates reduce the world volume of trade and investment?

Question 13

Describe the design of an international monetary system with respect to the degree of cooperation among countries and the number of rules involved in a system.