WEEK 7 Flashcards

(46 cards)

1
Q

What is the international monetary system?

A

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

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2
Q

What is a floating exchange rate?

A

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

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3
Q

Who typically uses a floating exchange rate?

A

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

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4
Q

What is a pegged exchange rate?

A

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

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5
Q

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

A

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

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6
Q

What is a managed float (or dirty float)?

A

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

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7
Q

Why do countries use a managed float?

A

To protect their economy from instability, especially in developing nations

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8
Q

What is a fixed exchange rate system?

A

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

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8
Q

Who sets the exchange rate in a fixed system?

A

GOVERNMENTS or CENTRAL BANKS, by mutual agreement.

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9
Q

What is the Gold Standard?

A

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

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10
Q

What is the gold par value?

A

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

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11
Q

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

A

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

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12
Q

What was one advantage of the Gold Standard?

A

It made exchange rates PREDICTABLE and TRANSPARENT.

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13
Q

What two major institutions were created by Bretton Woods?

A

IMF (International Monetary Fund)
World Bank

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14
Q

How did the Gold Standard help avoid trade imbalances?

A

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

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15
Q

What was the purpose of the Bretton Woods Agreement?

A

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

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16
Q

What are the two main roles of the IMF?

A
  • Maintain exchange rate stability
  • Provide emergency financial support to countries in crisis
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17
Q

Could countries adjust their exchange rates under Bretton Woods?

A

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

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17
Q

Why did countries agree to fixed exchange rates?

A
  • To avoid competitive devaluations
  • To control inflation by encouraging responsible government spending
18
Q

What was the World Bank originally created to do?

A

Rebuild Europe after WWII by providing low-interest loans.

19
Q

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

A

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

20
Q

What is the World Bank’s main focus today?

A

Lending to developing nations, especially in the Global South.

21
Q

When did the Bretton Woods system collapse?

A

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

22
Q

What system replaced Bretton Woods after 1973?

A

The managed float exchange rate system.

22
Why was overreliance on the U.S. dollar a problem?
It was the only currency convertible to gold; if the dollar weakened, it threatened the entire system.
23
What domestic U.S. policies contributed to the collapse?
President Johnson’s spending on the Vietnam War and welfare programs, funded by printing money, not taxes → led to high inflation.
24
What agreement replaced Bretton Woods and legalized floating exchange rates?
The Jamaica Agreement of 1976.
25
What were 4 key results of the Jamaica Agreement?
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
26
What happened to gold under the Jamaica Agreement?
IMF returned gold to countries and allowed them to sell it at market value.
27
What is a major drawback of floating exchange rates?
Volatility — currency values can change unpredictably due to global events.
28
What are the advantages of floating exchange rates? - monetary policy autonomy - automatic trade balance adjustments - economic recovery support
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.
29
What are the advantages of fixed exchange rates? - monetary discipline - less speculation - predictability
Monetary discipline – Helps control inflation and government overspending. Less speculation – Stability reduces risky currency speculation. Predictability – Encourages stable trade and investment conditions.
30
Floating vs. Fixed Exchange Rates: Key Trade-Off?
Floating = Flexibility and autonomy, but more volatility. Fixed = Stability and discipline, but less policy freedom.
31
What are the main types of exchange rate regimes countries use?
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.
32
What is a pegged exchange rate?
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.
33
What does the IMF say about inflation under different exchange rate regimes?
Pegged regimes: ~8% inflation Intermediate regimes: ~14% inflation Floating regimes: ~16% inflation
34
What is a currency board?
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.
35
What is the IMF’s role in crisis management?
Lends to countries in financial crisis Requires policy reforms (austerity, monetary tightening) Role expanded due to more frequent global crises
36
What are the 3 types of crises the IMF responds to?
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)
37
What conditions often come with IMF loans?
Cut government spending Raise interest rates Tighten monetary policy
38
What are 3 major criticisms of the IMF?
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
39
What are the 3 key areas of managerial implications in international business?
Currency Management Business Strategy Corporate–Government Relations
40
Why is currency management important for international firms?
Foreign exchange markets are unpredictable Governments and market speculation affect currency value Companies must hedge to protect earnings from volatility
40
How can businesses manage currency risk?
Monitor government and market activity Use hedging tools Adjust operations to reduce exposure to currency changes
40
How can exchange rate changes impact a business’s strategy?
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
41
What role do corporate–government relations play in currency issues?
Firms can lobby for stable exchange rates They promote less volatility Especially helpful when currency values don’t reflect real economic conditions