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rate system. There are three international exchange rate systems in history: the gold standard, the Bretton Woods, and the floating exchange rate system.
imbalances in balance of payments quickly and at a relatively lower cost; Stability and Confidence: the system must be able to keep exchange rates relatively fixed and people must have confidence in the stability of the system; Liquidity: the system must be able to provide enough reserve assets for a nation to correct its balance of payments deficits without making the nation run into deflation or inflation.
Abbreviation: FOREX
worth are traded daily. Most trading is to finance the purchase of assets (e.g., bank deposits), not goods and services. OTC (several hundred dealers, mostly banks) Wholesale vs. retail
Flexible rate
Exchange rate
Fixed rate
Central bank buys and sells
determined by supply and demand. Characterized by volatility. Creates uncertainty in conducting international business. Changes in value called appreciation and depreciation.
domestic currency at a fixed price. The gold standard was a fixed exchange rate regime. Bretton Woods was another. Provides more certainty in the short run but the system is susceptible to speculative attacks. Changes in value called revaluation and devaluation.
central bank determines rate by buying or selling currency. Managed float isnt really a single system, but describes a continuum of systems Smoothing daily fluctuations Leaning against the wind slowing the change to a different rate Unofficial pegging: actually fixing the rate without saying so. Target-Zone Arrangement: countries agree to maintain exchange rates within a certain bound What makes target zone arrangements special is the understanding that countries will adjust real economic policies to maintain the zone.
IMF is a forum of national economic policies, international monetary and financial systems, which involves active dialogue with each member Country. When there is a country where has a serious
of the world.
Bretton Woods conference to prevent the kinds of chain reaction in the economic system that caused world currencies to collapse like in the Great Depression of the 1930s.
created in 1946.
exchanges and to help nations having balance of payment problems through short term loans of cash.
IMF headquarters is in Washington D.C , U.S.A Five largest shareholders are United States, Japan, Germany, France, United
Kingdom.
China, Russia, and Saudi Arabia have their own seats on the Board. 16 other Executive Directors are elected for two year terms by groups of
Total quotas of $312 billion; outstanding loans of $71 billion to 82 countries. The International Monetary Fund (IMF) is an organization of 186 countries.
economics.
countries.
Technical Assistance (like a teacher) Strengthening human skills and institutional
capacity of countries.
Financial Assistance (like a banker)
Lending to countries to support reforms
IMF credits Change of exchange rates: devaluations or revaluations Coordination between governments: the Plaza
Agreement, the Lourve Accord, etc Domestic policies: Two-gap theory C+I+G+X=C+S+T+M X-M=(S-I)+(T-G)