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Questions and Answers
What characterized the international monetary system before the 1870s?
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 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 main feature of the Bretton Woods system?
What was the outcome of the meeting of IMF members in Jamaica in 1973?
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?
What was the primary characteristic of the interwar period?
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What was the core of the Bretton Woods system?
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?
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?
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?
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?
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.
