WEEK 7

Question 1

What is the international monetary system?

Answer 1

A system of rules and institutions that govern exchange rates between different currencies

Question 2

What is a floating exchange rate?

Answer 2

A system where the currency’s value is determined by supply and demand in the foreign exchange market

Question 3

Who typically uses a floating exchange rate?

Answer 3

Most developed countries (e.g., U.S., U.K., Japan, Canada)

Question 4

What is a pegged exchange rate?

Answer 4

A system where a country’s currency is fixed to a major currency (like the U.S. dollar or euro).

Question 5

How is the exchange rate to other currencies determined in a pegged system?

Answer 5

By the value of the currency it’s pegged to.

Question 6

What is a managed float (or dirty float)?

Answer 6

A hybrid system where the currency’s value is mostly set by the market, but central banks intervene to stabilize it when needed.

Question 7

Why do countries use a managed float?

Answer 7

To protect their economy from instability, especially in developing nations

Question 8

What is a fixed exchange rate system?

Answer 8

A system where countries agree to keep their exchange rates constant relative to each other.

Question 8

Who sets the exchange rate in a fixed system?

Answer 8

GOVERNMENTS or CENTRAL BANKS, by mutual agreement.

Question 9

What is the Gold Standard?

Answer 9

A system where currencies are tied to a specific amount of gold.

Question 10

What is the gold par value?

Answer 10

The amount of a currency needed to buy one ounce of gold.

Question 11

What was a key strength of the Gold Standard regarding trade?

Answer 11

It promoted a balance-of-trade equilibrium (exports = imports).

Question 12

What was one advantage of the Gold Standard?

Answer 12

It made exchange rates PREDICTABLE and TRANSPARENT.

Question 13

What two major institutions were created by Bretton Woods?

Answer 13

IMF (International Monetary Fund)
World Bank

Question 14

How did the Gold Standard help avoid trade imbalances?

Answer 14

Since currencies were tied to gold, payments between countries stayed balanced — no long-term trade deficits or surpluses

Question 15

What was the purpose of the Bretton Woods Agreement?

Answer 15

To prevent economic chaos like what happened during the Great Depression.

Question 16

What are the two main roles of the IMF?

Answer 16

• Maintain exchange rate stability
• Provide emergency financial support to countries in crisis

Question 17

Could countries adjust their exchange rates under Bretton Woods?

Answer 17

Yes, but only with IMF approval, usually to help countries facing unemployment or economic shocks.

Question 17

Why did countries agree to fixed exchange rates?

Answer 17

• To avoid competitive devaluations
• To control inflation by encouraging responsible government spending

Question 18

What was the World Bank originally created to do?

Answer 18

Rebuild Europe after WWII by providing low-interest loans.

Question 19

Why didn’t the World Bank play a big role in rebuilding Europe?

Answer 19

The Marshall Plan (U.S. aid) took the lead instead.

Question 20

What is the World Bank’s main focus today?

Answer 20

Lending to developing nations, especially in the Global South.

Question 21

When did the Bretton Woods system collapse?

Answer 21

In 1973, after working well until the late 1960s.

Question 22

What system replaced Bretton Woods after 1973?

Answer 22

The managed float exchange rate system.

Question 22

Why was overreliance on the U.S. dollar a problem?

Answer 22

It was the only currency convertible to gold; if the dollar weakened, it threatened the entire system.

Question 23

What domestic U.S. policies contributed to the collapse?

Answer 23

President Johnson’s spending on the Vietnam War and welfare programs, funded by printing money, not taxes → led to high inflation.

Question 24

What agreement replaced Bretton Woods and legalized floating exchange rates?

Answer 24

The Jamaica Agreement of 1976.

Question 25

What were 4 key results of the Jamaica Agreement?

Answer 25

1. Floating exchange rates legalized 2. Gold abandoned as a reserve asset 3. IMF quotas increased (from $41B to $767B) 4. More support for poorer, non-oil-exporting countries

Question 26

What happened to gold under the Jamaica Agreement?

Answer 26

IMF returned gold to countries and allowed them to sell it at market value.

Question 27

What is a major drawback of floating exchange rates?

Answer 27

Volatility — currency values can change unpredictably due to global events.

Question 28

What are the advantages of floating exchange rates? - monetary policy autonomy - automatic trade balance adjustments - economic recovery support

Answer 28

Monetary policy autonomy – Nations control their own interest rates and policies. Automatic trade balance adjustments – Exchange rates shift to correct trade imbalances. Economic recovery support – Greater flexibility in responding to economic crises.

Question 29

What are the advantages of fixed exchange rates? - monetary discipline - less speculation - predictability

Answer 29

Monetary discipline – Helps control inflation and government overspending. Less speculation – Stability reduces risky currency speculation. Predictability – Encourages stable trade and investment conditions.

Question 30

Floating vs. Fixed Exchange Rates: Key Trade-Off?

Answer 30

Floating = Flexibility and autonomy, but more volatility. Fixed = Stability and discipline, but less policy freedom.

Question 31

What are the main types of exchange rate regimes countries use?

Answer 31

Free float – Market determines currency value. Pegged systems – Currency tied to a major one (e.g., USD). Currency boards – Rigid version of a peg with 100% foreign reserve backing.

Question 32

What is a pegged exchange rate?

Answer 32

Currency is tied to a major currency like the USD. If the USD rises, the pegged currency also rises. Common in smaller or developing countries. Main advantage: Enforces monetary discipline → helps reduce inflation.

Question 33

What does the IMF say about inflation under different exchange rate regimes?

Answer 33

Pegged regimes: ~8% inflation Intermediate regimes: ~14% inflation Floating regimes: ~16% inflation

Question 34

What is a currency board?

Answer 34

Fixed exchange rate system with full reserve backing. Domestic currency convertible into foreign currency on demand. Must hold 100% foreign reserves for every unit of domestic currency.

Question 35

What is the IMF’s role in crisis management?

Answer 35

Lends to countries in financial crisis Requires policy reforms (austerity, monetary tightening) Role expanded due to more frequent global crises

Question 36

What are the 3 types of crises the IMF responds to?

Answer 36

Currency Crisis – Sudden fall in currency value (e.g., Brazil 2002) Banking Crisis – Loss of faith in banks, mass withdrawals (e.g., 2008) Foreign Debt Crisis – Country can’t repay external debt (e.g., Greece 2010)

Question 37

What conditions often come with IMF loans?

Answer 37

Cut government spending Raise interest rates Tighten monetary policy

Question 38

What are 3 major criticisms of the IMF?

Answer 38

Inappropriate Policies - One-size-fits-all Moral Hazard - Countries and banks may act recklessly, expecting bailouts Lack of Accountability - Decisions by small expert teams who don’t always understand what’s really happening in the country

Question 39

What are the 3 key areas of managerial implications in international business?

Answer 39

Currency Management Business Strategy Corporate–Government Relations

Question 40

Why is currency management important for international firms?

Answer 40

Foreign exchange markets are unpredictable Governments and market speculation affect currency value Companies must hedge to protect earnings from volatility

Question 40

How can businesses manage currency risk?

Answer 40

Monitor government and market activity Use hedging tools Adjust operations to reduce exposure to currency changes

Question 40

How can exchange rate changes impact a business’s strategy?

Answer 40

A stronger currency can make products more expensive abroad This can hurt competitiveness and profits Firms should diversify, adjust pricing, and use flexible supply chains

Question 41

What role do corporate–government relations play in currency issues?

Answer 41

Firms can lobby for stable exchange rates They promote less volatility Especially helpful when currency values don’t reflect real economic conditions