24 Questions
What was declared acceptable to IMF members under the Jamaica Agreement?
Flexible exchange rates
What is a characteristic of a fixed exchange rate regime?
Value of a country's currency is attached to the value of another single currency
What is a potential drawback of a flexible exchange rate regime?
Creates uncertainty due to unpredictability
What is a benefit of a fixed exchange rate regime?
Promotes stable international trade
What was officially abandoned as an international reserve asset under the Jamaica Agreement?
Gold
What is a benefit of a flexible exchange rate regime?
Allows automatic adjustment to economic conditions
What is a type of exchange rate regime that allows a country's currency to be attached to the value of another single currency?
Fixed exchange rate regime
What is a potential drawback of a fixed exchange rate regime?
Limits economic flexibility
What characterized the international monetary system before the 1870s?
Bimetallism
What were the three essential features of the classical gold standard?
Unrestricted coinage of gold, two-way convertibility, and free export and import of gold
What was the main characteristic of the interwar period?
Economic nationalism and halfhearted attempts to restore the gold standard
What was established in Bretton Woods in 1945?
The International Monetary Fund (IMF)
What is characterized by a dollar-based gold-exchange standard?
The Bretton Woods system
When did the flexible exchange rate regime begin?
1973
What was the outcome of the Bretton Woods system?
A coherent international monetary system
What was the main outcome of the interwar period?
Profoundly detrimental effects on international trade and investment
What is a major risk that firms and individuals are exposed to when conducting cross-border transactions?
Foreign exchange risk
What is a consequence of market imperfections in international finance?
Restrictions on portfolio diversification
What is the term for the overall financial environment in which multinational corporations and international investors operate?
International Monetary System
What is a benefit that firms can gain from venturing into global markets?
Expanded opportunity set
What is a characteristic of international finance that distinguishes it from domestic finance?
All of the above
What is an example of a political risk that multinational corporations may face?
Changes in tax rules
What is the term for the risks associated with conducting business in a foreign country?
Political risk
What is a stage of evolution of the international monetary system?
Bimetallism
Study Notes
Jamaica Agreement
- Flexible exchange rates were declared acceptable to IMF members
- Central banks were allowed to intervene in exchange markets to iron out unwarranted volatilities
- Gold was officially abandoned (demonetized) as an international reserve asset
- Non-oil-exporting countries and less-developed countries were given greater access to IMF funds
Exchange Rate Regimes
- Fixed or pegged exchange rate regime:
- Attaches the value of a country's currency to another currency, a basket of currencies, or a measure of value (e.g. gold)
- Pros: reduces currency risk and speculation, promotes stable international trade, promotes investment
- Cons: limits economic flexibility, might require high foreign reserves, can lead to balance of payment deficits or surpluses
- Flexible or floating exchange rate regime:
- Value of a country's currency is determined by the open market through supply and demand
- Pros: allows automatic adjustment to economic conditions, provides independence to domestic monetary policy, facilitates capital mobility
- Cons: creates uncertainty due to unpredictability, can lead to high inflation due to depreciation, potential for competitive devaluation
- Crawling pegs: a system where the exchange rate is adjusted gradually over time to correct for inflation or other economic changes
International Monetary System Evolution
- Bimetallism (before 1875): both gold and silver were used as international means of payment and exchange rates were determined by their gold or silver contents
- Classical gold standard (1875-1914): gold alone was assured of unrestricted coinage, with two-way convertibility between gold and national currencies at a stable ratio
- Interwar period (1915-1944): economic nationalism, attempts to restore the gold standard failed, economic and political instabilities, bank failures, and panicky flights of capital across borders
- Bretton Woods system (1945-1972): dollar-based gold-exchange standard, established by the IMF
- Flexible exchange rate regime (since 1973): IMF members met in Jamaica and agreed to a new set of rules for the international monetary system
International Finance
- Concerned with topics such as foreign direct investment, currency exchange rates, and financial management
- Involve issues pertaining to political and foreign exchange risk, managing multinational corporations, foreign exchange exposure, foreign direct investment decisions, and multinational capital budgeting
- Importance of international finance stems from the highly globalized and integrated world economy
- Three major dimensions set international finance apart from domestic finance:
- Foreign exchange and political risks
- Market imperfections
- Expanded opportunity set
This quiz covers the key elements of the Jamaica Agreement, including flexible exchange rates, demonetization of gold, and IMF fund access for non-oil-exporting countries. It also introduces exchange rate regimes.
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