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Questions and Answers
What characterized the international monetary system before the 1870s?
What is a necessary condition for unrestricted convertibility into gold in a classical gold standard?
What was the main feature of the Bretton Woods system?
What was the outcome of the meeting of IMF members in Jamaica in 1973?
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What was the primary characteristic of the interwar period?
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What was the core of the Bretton Woods system?
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What was the primary consequence of the lack of a coherent international monetary system during the interwar period?
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What was the primary characteristic of the classical gold standard?
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What was the main outcome of the meeting of representatives of 44 nations in Bretton Woods in 1944?
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What was the primary characteristic of the international monetary system since 1973?
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Study Notes
Jamaica Agreement
- Flexible exchange rates declared acceptable to IMF members
- Central banks allowed to intervene in exchange markets to reduce unwarranted volatilities
- Gold officially abandoned as an international reserve asset
- Non-oil-exporting countries and less-developed countries given greater access to IMF funds
Exchange Rate Regimes
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Fixed or pegged exchange rate regime: currency value attached to another currency, basket of currencies, or 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
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Flexible or floating exchange rate regime: currency value determined by open market 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, potential for competitive devaluation
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Crawling peg: exchange rate regime that allows gradual depreciation or appreciation
- Pros: stability with trading partners, minimized forex fluctuations, inflation expectations management, preservation of foreign exchange reserves
- Cons: artificial exchange rates, speculation risk, active intervention, economic impact
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Managed float: central bank occasionally intervenes to change direction or pace of currency value
- Pros: provides balance between fixed and floating exchange rates, allows some flexibility in monetary policy, acts as a buffer against speculative attacks
- Cons: can lead to manipulation of exchange rate, unpredictability that creates uncertainty, costly and difficult to manage
Balance of Payments (BOP)
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Provides detailed information on demand and supply of a country's currency
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Signals a country's potential as a business partner for the rest of the world
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Used to evaluate a country's performance in international economic competition
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Three main types of international transactions:
- Current account: includes export and import of goods and services
- Capital account: includes investments and loans
- Reserve account: includes changes in official reserves
International Monetary System
- Before 1870s: "bimetallism" - both gold and silver used as international means of payment
- 1875-1914: Classical gold standard - gold alone assured of unrestricted coinage, two-way convertibility between gold and national currencies
- 1915-1944: Interwar period - no coherent international monetary system prevailed
- 1945-1972: Bretton Woods system - dollar-based gold-exchange standard
- 1973-present: Flexible exchange rate regime - IMF members agreed to new set of rules for international monetary system
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Description
Learn about the key elements of the Jamaica Agreement, including flexible exchange rates, demonetization of gold, and access to IMF funds. Understand exchange rate regimes and their importance.
