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The Monetary System in the International Arena - Coggle Diagram
The Monetary System in the International Arena
The International Monetary System
The international monetary system can be seen as a network affecting international payments through institutions, rules, and regulations.
The choice of the unit of account that is the agreed measure of the value of currencies
International cooperation concerning adjustment methods, concerted intervention, and reserve assets.
A time element regarding the elimination of balance of payments disequilibrium among countries, that is, countries must be allowed suffictime to adjust without severe recessions or high inflation but, at the same time, should not be allowed to avoid adjustment at the expense of other countries.
Promotion of free international trade so that productive resources are optimally allocated.
Advantages and Disadvantages of Fixed and Flexible Exchange Rates
International monetary stability
It is argued that fixed exchange rates facilitate international trade. Pricing is easier, and the cost of foreign exchange
transactions is very low.
Problems can arise from destabilizing speculation when a country is about to run out of foreign exchange.
Economic policy independence
The main advantage of fixed exchange rates
(which can also be considered a disadvantage) is the imposition of discipline on the conduct of macroeconomic policy.
Higher inflation will lead to a balance of payments deficit and
will require corrective action through expenditure-switching policies.
Exchange Rate Determination
Interest Rates
Capital markets today are global. Massive amounts of money
travel with the speed of light in search of the highest returns
Relative National Incomes.
When incomes abroad rise, there is an increased demand for US goods. Hence, the demand for dollars increases as foreign residents supplies more foreign currency in exchange for dollars.
Expectations.
Expectations about changes in the future value of a currency also exert a significant influence on exchange rates. For example, if markets are doubtful as to the ability of the US government to control inflation, they will expect the dollar to depreciate.
Relative Price Levels
The demand for imports in the United States and foreign demand for US exports will also depend on the price levels prevailing in and abroad.
Balance of Payments Disequilibrium
The key to understanding the balance of payments imbalances is the distinction between autonomous and offsetting or accommodating transactions.