Chapter 4 In Class Notes

Question 1

Gold was used for economic contracting (currency) or used as collateral for currency. Countries would assess value of currency in gold. Compare amount of gold backing each currency.

Answer 1

Gold Standard

Question 2

Only Congress was allowed to print money at first, but who was given that power later.

Answer 2

The federal reserve. On 1913 Wilson passed the Federal Reserve Act where the federal reserve could print money.

Question 3

Did the founding fathers want to currency to be gold standard.

Answer 3

Yes, but it’s not like that anymore.

Question 4

In 1944, they tried to go back to the gold standard so it would be more stable?

Answer 4

True

Question 5

What were the plans in setting up the gold standard in 1944

Answer 5

1. Countries to cooperate with respect to currencies
2. currencies stable value (gold standard)
3. USD- the initial currency linked to gold at $35 per ounce.
4. Federal reserve hold gold to back USD. So you could go to the Federal reserve to trade gold for money and money for gold.
5. International Monetary Fund created (oversees global banking system)
6. periodic re assess values.

Question 6

In 1972 the Great Britain Pound collapsed on the Gold Standard and the fixed rate standard collapsed.

Answer 6

True

Question 7

Theot Currency

Answer 7

Currency that isn’t back by anything.

Question 8

Fixed rate currency system.

Answer 8

Currency with an anchor such as goldd

Question 9

Value of the currency is determined by supply and demand.

Answer 9

Floating rate currency

Question 10

Says government force the authorities only against reserves of a foreign currency. The two currencies maintain a fixed rate of exchange.

Answer 10

Currency Board Arrangements

Question 11

Requires a country to maintain it’s country relative to an anchor currency with a narrow band of +- percent

Answer 11

Conventional fixed peg arrangements

Question 12

represents slightly looser peg and the band is often in the range of 1 to 2 percent.

Answer 12

Pegged Exchange Rates within Horizontal bands

Question 13

value adjusted in small amounts at a fixed rate. affected by inflation

Answer 13

crawlings pegs

Question 14

monetary authorities manage currencies actively.

Answer 14

Managed floating.

Question 15

market forces primarily set the exchange rate.

Answer 15

Independent floating rate. The USD, EUR JPY, GBP, and CHF use this. Authorities try to make sure there’s not sudden changes

Question 16

Requires large investment
requires confidence in monetary system
liquidity in currency mobile capital
Open Economy
Flexible Labor Force
Macro-economic policies meet national priorities
subject to speculation

Answer 16

Floating Rate Currency

Question 17

More common in small economies.
\+imposes discipline on smaller currencies.
\+Following economic policies of the pay
\+simplifies currency management
-mirror economy of peg (give up control)
- relying on financial system of peg

Answer 17

Peg Currency System

Question 18

Rise in prices.

Answer 18

Inflation

Question 19

If GDP goes up, imporsts go up and value of foreign currency goes up?

Answer 19

True

Question 20

2 simaltaneous transactions to netrualize change in currency

Answer 20

Sterilize

Question 21

What two ways do they sterilize

Answer 21

currency transaction

offsetting inventory base transaction

Question 22

Spot market
Forward market intervention
Foreign exchange swap intervention
Option market intervention
Indirect intervention

Answer 22

Ways the governments intervene in currency markets

Question 23

List 2 indirect interventions

Answer 23

Buy foreign bonds
currency controls
Taxes

Question 24

List some causes of currency crises in Emerging markets

Answer 24

1. Economies not well diversified
2. financial markets lack depth and risk goes up
3. Trade & Budget deficits
4. rely on short-term, external debt. Downgrades = higher interest rates
5. Weak economies institutions

Question 25

Results of currency crises

Answer 25

Credit downgraded and interest goes up.
Stock markets can collapse
Financial systems can collapse
Value of currency plunges