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The Monetary System in the International Arena - Coggle Diagram
The Monetary System in the International Arena
International monetary system
A network effecting international payments through institutions, rules, and regulations.
Should possess certain characteristics, such as a time element regarding the elimination of balance of payments disequilibrium among countries, the choice of the unit of account, international cooperation with respect to adjustment methods, concerted intervention, and reserve assets.
The gold standard is the only example in history when exchange rates were truly fixed.
The Bretton Woods system was established in 1944 after World War II. It was a system of fixed exchange rates based on the US dollar, which was pegged to gold.
Fixed Exchange Rates
Advantages
Provide stability and predictability for businesses and investors.
Can help to reduce inflation.
Can make it easier to conduct international trade.
Disadvantages
Can be vulnerable to speculative attacks.
Can also limit the ability of the government to conduct independent monetary policy.
Flexible Exchange Rates
Advantages
More responsive to market forces.
Can help to correct balance of payments imbalances.
When a country's balance of payments is in deficit, the currency will depreciate, which will make its exports cheaper and imports more expensive. This can help to correct the deficit.
Give the government more flexibility to conduct independent monetary policy.
The government can raise interest rates to combat inflation without worrying about a depreciation of the currency.
Disadvantages
Can be more volatile than fixed exchange rates.
Businesses may have to hedge against currency risk, which can add to their costs.
Can make it more difficult to conduct international trade.
This can make it more difficult for businesses to plan for the future and make investment decisions.
The International Monetary Fund
Role
Promote international monetary cooperation and facilitate international trade.
Provides loans to countries that are experiencing balance of payments difficulties.
Provides technical assistance to countries to help them improve their economic policies.
The European Monetary Union
Features
Single monetary policy, which is set by the European Central Bank.
No exchange rate controls between member states.
Free movement of capital.
Creation
Established in 1999 with the introduction of the euro, which is the common currency of the member states.
The Future of the International Monetary System
Proposals
Return to fixed exchange rates.
Managed floating exchange rates.
A single global currency.
Uncertain