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Questions and Answers
What is one of the basic objectives of the IMF?
What does the IMF require member countries to do to ensure exchange rate stability?
Under what conditions can a member country devalue its currency without seeking approval?
What action can the IMF take if it declares a currency scarce?
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What is one action that members are forbidden to do in relation to gold according to the text?
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In what situation does the IMF act as the international lender of the last resort?
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What was the requirement for a country to make adjustments in the par value of their currency exceeding 20%?
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What does the IMF discourage in relation to currency?
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What is the consequence if a country changes the par value of its currency without IMF approval?
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What autonomy are member countries given regarding exchange arrangements?
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Under what condition can a member nation unconditionally borrow from the IMF?
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What is one of the norms that member countries are expected to follow under surveillance arrangements of the Fund?
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Study Notes
Maintaining Exchange Stability
- The IMF aims to establish reasonable exchange rate stability and discourage fluctuations.
- Each member country declares a par value of its currency in terms of gold or US dollars.
- Members agree to keep their currencies' free convertibility within 1% above or below par value.
- Devaluation up to 10% is allowed by merely informing the IMF, but greater changes require approval.
- The IMF may declare a currency scarce, ration it, and ask the country to revalue and maintain imports.
- Members are forbidden to use multiple exchange rates or buy/sell gold at prices other than the declared par value.
Determination of Par Values
- The IMF's original Articles of Agreement required member countries to declare par values of their currencies in terms of gold or US dollars.
- The US dollar was convertible into gold under the Bretton Woods system of adjustable pegging.
- Countries can make adjustments up to 10% by informing the IMF, but changes above 10% require approval.
- The IMF discourages competitive currency devaluation and can terminate membership if a country changes its par value without approval.
- The revised Articles of Agreement give member countries autonomy regarding exchange arrangements, allowing exchange rates to float or change according to market conditions.
Credit Facilities
- The IMF operates various borrowing facilities to help member countries correct balance of payments disequilibrium.
- The Basic Credit Facility provides financial assistance to member nations to overcome temporary balance of payments difficulties.
- Members can purchase other currencies or SDRs in exchange for their own currency to finance payment deficits.
- The loan is repaid when the member repurchases its own currency with other currencies or SDRs.
- Members can unconditionally borrow from the IMF up to 25% of their quota in a year, known as the reserve tranche.
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Description
Explore the main functions and operations of the International Monetary Fund (IMF) with a focus on maintaining exchange stability. Learn about the measures taken by the IMF to ensure stability in exchange rates and how member countries declare the par value of their currencies.
