WEEK 7 Flashcards
(46 cards)
What is the international monetary system?
A system of rules and institutions that govern exchange rates between different currencies
What is a floating exchange rate?
A system where the currency’s value is determined by supply and demand in the foreign exchange market
Who typically uses a floating exchange rate?
Most developed countries (e.g., U.S., U.K., Japan, Canada)
What is a pegged exchange rate?
A system where a country’s currency is fixed to a major currency (like the U.S. dollar or euro).
How is the exchange rate to other currencies determined in a pegged system?
By the value of the currency it’s pegged to.
What is a managed float (or dirty float)?
A hybrid system where the currency’s value is mostly set by the market, but central banks intervene to stabilize it when needed.
Why do countries use a managed float?
To protect their economy from instability, especially in developing nations
What is a fixed exchange rate system?
A system where countries agree to keep their exchange rates constant relative to each other.
Who sets the exchange rate in a fixed system?
GOVERNMENTS or CENTRAL BANKS, by mutual agreement.
What is the Gold Standard?
A system where currencies are tied to a specific amount of gold.
What is the gold par value?
The amount of a currency needed to buy one ounce of gold.
What was a key strength of the Gold Standard regarding trade?
It promoted a balance-of-trade equilibrium (exports = imports).
What was one advantage of the Gold Standard?
It made exchange rates PREDICTABLE and TRANSPARENT.
What two major institutions were created by Bretton Woods?
IMF (International Monetary Fund)
World Bank
How did the Gold Standard help avoid trade imbalances?
Since currencies were tied to gold, payments between countries stayed balanced — no long-term trade deficits or surpluses
What was the purpose of the Bretton Woods Agreement?
To prevent economic chaos like what happened during the Great Depression.
What are the two main roles of the IMF?
- Maintain exchange rate stability
- Provide emergency financial support to countries in crisis
Could countries adjust their exchange rates under Bretton Woods?
Yes, but only with IMF approval, usually to help countries facing unemployment or economic shocks.
Why did countries agree to fixed exchange rates?
- To avoid competitive devaluations
- To control inflation by encouraging responsible government spending
What was the World Bank originally created to do?
Rebuild Europe after WWII by providing low-interest loans.
Why didn’t the World Bank play a big role in rebuilding Europe?
The Marshall Plan (U.S. aid) took the lead instead.
What is the World Bank’s main focus today?
Lending to developing nations, especially in the Global South.
When did the Bretton Woods system collapse?
In 1973, after working well until the late 1960s.
What system replaced Bretton Woods after 1973?
The managed float exchange rate system.