Ch002-International-Monetary-System

Eun/Resnick4e15Eun&Resnick4eCHAPTER2InternationalMonetarySystemEvolutionoftheInternationalMonetarySystemBimetallism:Before1875ClassicalGoldStandard:1875–1914InterwarPeriod:1915–1944BrettonWoodsSystem:1945–1972TheFlexibleExchangeRateRegime:1973–PresentTheCurrentExchangeRateArrangementsEuropeanMonetarySystemTheEuroandtheEuropeanMonetaryUnionABriefHistoryoftheEuroWhatAretheBenefitsofMonetaryUnion?CostsofMonetaryUnionProspectsoftheEuro:SomeCriticalQuestionsTheMexicanPesoCrisisTheAsianCurrencyCrisisOriginsoftheAsianCurrencyCrisisLessonsfromtheAsianCurrencyCrisisTheArgentinePesoCrisisFixedversusFlexibleExchangeRateRegimesSummaryMINICASE:WilltheU.K.JointheEuroClub?EvolutionoftheInternationalMonetarySystem1)Theinternationalmonetarysystemcanbedefinedastheinstitutionalframeworkwithinwhich:a)internationalpaymentsaremadeb)movementofcapitalisaccommodatedc)exchangeratesamongcurrenciesaredeterminedd)alloftheaboveAnswer:dpage25.2)Theinternationalmonetarysystemwentthroughseveraldistinctstagesofevolution.Thesestagesaresummarized,inalphabeticorder,asfollows(i)-Bimetallism(ii)-BrettonWoodssystem(iii)-Classicalgoldstandard(iv)-Flexibleexchangerateregime(v)-InterwarperiodThechronologicalorderthattheyactuallyoccurredis:a)(iii),(i),(iv),(ii),and(v)b)(i),(iii),(v),(ii),and(iv)Eun/Resnick4e16c)(vi),(i),(iii),(ii),and(v)d)(v),(ii),(i),(iii),and(iv)Answer:bBimetallism:Before18753)Gresham’sLawstatesthat()a)Badmoneydrivesgoodmoneyoutofcirculation.b)Goodmoneydrivesbadmoneyoutofcirculationc)Ifacountrybasesitscurrencyonbothgoldandsilver,atanofficialexchangerate,itwillbethemorevaluableofthetwometalsthatcirculate.d)Noneoftheabove.Answer:a4)Inthe1850stheFrenchfrancwasvaluedbybothgoldandsilver,undertheofficialFrenchratiowhichequatedagoldfranctoasilverfranc15½timesasheavy.Atthesametime,thegoldfromnewlydiscoveredminesinCaliforniapouredintothemarket,depressingthevalueofgold.Asaresult,a)Thefranceffectivelybecameasilvercurrency.b)Thefranceffectivelybecameagoldcurrency.c)SilverbecameovervaluedundertheFrenchofficialratiod)Answersa)andc)arecorrectAnswer:b5)Supposethatthepoundispeggedtogoldat£20perounceandthedollarispeggedtogoldat$35perounce.Thisimpliesanexchangerateof$1.75perpound.Ifthecurrentmarketexchangerateis$1.80perpound,howwouldyoutakeadvantageofthissituation?Hint:assumethatyouhave$350availableforinvestment.a)Startwith$350.Buy10ouncesofgoldwithdollarsat$35perounce.Convertthegoldto£200at£20perounce.Exchangethe£200fordollarsatthecurrentrateof$1.80perpoundtoget$360.b)Startwith$350.Exchangethedollarsforpoundsatthecurrentrateof$1.80perpound.Buygoldwithpoundsat£20perounce.Convertthegoldtodollarsat$35perounce.c)a)andb)bothworkd)noneoftheaboveAnswer:a6)Priortothe1870s,bothgoldandsilverwereusedasinternationalmeansofpaymentandtheexchangeratesamongcurrenciesweredeterminedbyeithertheirgoldorsilvercontents.Supposethatthedollarwaspeggedtogoldat$30perounce,theFrenchfrancispeggedtogoldat90francsperounceandtosilverat6francsperounceofsilver,andtheGermanmarkpeggedtosilverat1markperounceofsilver.WhatwouldtheexchangeratebetweentheU.S.dollarandGermanmarkbeunderthissystem?a)1Germanmark=$2Eun/Resnick4e17b)1Germanmark=$0.50c)1Germanmark=$45d)1Germanmark=$1Answer:apage26.Rationale:Startwith$30,buyoneounceofgold.SellthatounceofgoldforFF90.SelltheFF90for15ouncesofsilver.Buy15Germanmarks.Thus,$30=DM15.ClassicalGoldStandard:1875-19147)An“international”goldstandardcanbesaidtoexistwhena)goldaloneisassuredofunrestrictedcoinageb)thereistwo-wayconvertibilitybetweengoldandnationalcurrenciesatstableratiosc)goldmaybefreelyexportedorimportedd)alloftheaboveAnswer:d-p.288)SupposethattheBritishpoundispeggedtogoldat£6perounce,whereasoneounceofgoldisworth€12.Underthegoldstandard,anymisalignmentoftheexchangeratewillbeautomaticallycorrectedbycrossborderflowsofgold.Calculatethepossiblesavingsforbuying€1,000,iftheBritishpoundbecomesundervaluedandtradesfor€1.80.(Assumezeroshippingcosts).(Hint:GoldisfirstpurchasedusingthedevaluedBritishpoundfromtheBankofEngland,thenshippedtoFranceandsoldfor€1,000totheBankofFrance).a)£55.56b)£65.56c)£75.56d)£85.56Answer:a-p.28Rationale:SinceanounceofgoldshouldbeworththesamenorthorsouthoftheEnglishChannel,itshouldbe€12=£6.Soourexchangerateimpliedbygoldpricesis€2=£1,thereforebuying€1,000shouldcost£500:€1,000×£1/€2=£500.00Ifthepoundisundervaluedat€1.80,wefindthat€1,000costs£555.56:€1,000×£1/€1.80=£555.56Savingsinbuying€1,000byusinggoldandnotpostedexchangerates:£555.56-£500.00=£55.569)Underagoldstandard,ifBritainexportedmoretoFrancethanFranceexportedtoGreatBritain,a)Suchinternationalimbalancesofpaymentwillbecorrectedautomatically.b)Thistypeofimbalancewillnotbeabletopersistindefinitelyc)NetexportfromBritainwillbeaccompaniedbyanetflowofgoldintheoppositeEun/Resnick4e18direction.d)AlloftheaboveAnswer:dpage27.10)SupposethatBritainpegsthepoundtogoldatsixpoundsperounce,whereastheexchangeratebetweenpoundsandU.S.dollarsis$5=£1.WhatshouldanounceofgoldbeworthinU.S.dollars?a)$29.40b)$30.00c)$0.83d)$1.20Answer:b)Rationale:1oz.Au=£6and£1=$5so£6=$30=1oz.Au11)Underthegoldstandard,i