International Business 8e By Charles W.L. Hill Welcome to International Business, Eighth Edition, by Charles W. L. Hill

The International Monetary System Chapter 10 The International Monetary System Chapter 10: The International Monetary System McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

What Is The International Monetary System? The international monetary system refers to the institutional arrangements that countries adopt to govern exchange rates A floating exchange rate system exists when a country allows the foreign exchange market to determine the relative value of a currency a dirty float exists when a country tries to hold the value of its currency within some range of a reference currency A fixed exchange rate system exists when countries fix their currencies against each other European Monetary System (EMS) A pegged exchange rate system exists when a country fixes the value of its currency relative to a reference currency Did you know that there are international agreements that govern exchange rates? In this chapter we’re going to talk about the international monetary system—how it evolved and where the exchange system that’s in place today came from. We’ll also explore some of the implications of the system for international business. First, though, let’s go over some definitions. The international monetary system refers to the institutional arrangements that countries adopt to govern exchange rates. A floating exchange rate system exists when the foreign exchange rate market, or supply and demand, determine the relative values of currencies. This is the type of system used in the U.S., the EU, Japan, and Great Britain. When the value of a currency is determined by market forces, but the central bank intervenes if it depreciates too rapidly against an important reference currency, a dirty float exists. China has used this type of system since 2005. The yuan is allowed to float against a basket of currencies that include the dollar, the euro, and the yen, but only within very tight limits. Countries that adopt a fixed exchange rate system fix the values of their currencies against each other. Prior to the introduction of the euro, some EU countries operated under fixed exchange rates within the context of the European Monetary System. A pegged exchange rate system exists when the value of a currency is fixed to a reference country and the exchange rate between that currency and other currencies is determined by the reference currency exchange rate. As you might recall from the Opening Case, Latvia had a pegged system of exchange rates.

What Was The Gold Standard? The gold standard refers to a system in which countries peg currencies to gold and guarantee their convertibility the gold standard dates back to ancient times when gold coins were a medium of exchange, unit of account, and store of value payment for imports was made in gold or silver later, payment was made in paper currency which was linked to gold at a fixed rate in the 1880s, most nations followed the gold standard $1 = 23.22 grains of “fine” (pure) gold the gold par value refers to the amount of a currency needed to purchase one ounce of gold Why are there so many different types of exchange rate systems? Well, to understand the current international monetary system, we have to go back to the 1930s and the time of the Gold Standard to see the evolution of today’s system. The origin of the gold standard dates back to ancient times when gold coins were the medium of exchange. When there little international trade, international transactions were made in gold or silver, but after the Industrial Revolution, a new system was needed, and the gold standard was established. Under the gold standard, each currency was linked to a fixed amount of gold. The dollar for example, was equal to 23.22 grains of fine gold. The exchange rate between currencies then, was based on the gold par value, or the amount of a currency needed to purchase one ounce of gold. In other words, if you had dollars, and needed francs, you would convert your dollars to gold at the rate of 23.22 grains of gold per dollar, and then convert the gold to francs at the franc/gold rate.

Why Did The Gold Standard Make Sense? The great strength of the gold standard was that it contained a powerful mechanism for achieving balance-of-trade equilibrium - when the income a country’s residents earn from its exports is equal to the money its residents pay for imports The gold standard worked well from the 1870s until 1914 but, many governments financed their World War I expenditures by printing money and so, created inflation People lost confidence in the system demanded gold for their currency putting pressure on countries' gold reserves, and forcing them to suspend gold convertibility By 1939, the gold standard was dead Why was the gold standard attractive? The gold standard was attractive because it had a powerful mechanism for simultaneously achieving balance of trade equilibrium for all countries. A country has balance of trade equilibrium when the income a country’s residents earn from its exports is equal to the money its residents pay for imports. What does this mean? Well, if Japan has a trade surplus with the U.S., or exports more to the U.S. than it imports, we see dollars flowing out if the U.S. to pay for the imports. After the Japanese exporters cash the dollars in for yen at the Japanese bank, the Japanese bank will trade them for gold with the U.S. The outflow of gold from the U.S. will reduce the U.S money supply and increase Japan’s money supply causing higher prices in Japan and lower prices in the U.S. So, demand for Japanese goods will drop, while demand for American products will rise, and balance of payments equilibrium will be achieved. The gold standard was followed from the 1870s until the start of World War I when it was abandoned. By the end of the war in 1918, prices were higher everywhere because countries had printed money to finance their war expenditures. Again, recall the relationship between the money supply and inflation that we talked about in Chapter 9! . Then, in an effort to encourage exports and domestic employment, countries started to devalue their currencies. Recall, that if a country’s currency is worth less, imports will be more expensive, and exports will be cheaper. People began to lose confidence in the system and started to demand gold for their currency putting pressure on countries’ gold reserves and forcing them to suspend convertibility. By the start of World War II in 1939, the gold standard had been abandoned.

What Was The Bretton Woods System? In 1944, representatives from 44 countries met at Bretton Woods, New Hampshire, to design a new international monetary system that would facilitate postwar economic growth Under the new agreement a fixed exchange rate system was established all currencies were fixed to gold, but only the U.S. dollar was directly convertible to gold devaluations could not to be used for competitive purposes a country could not devalue its currency by more than 10% without IMF approval A new international monetary system was established in 1944. Representatives from 44 countries met at Bretton Woods, New Hampshire with the goal of building an enduring economic order that would facilitate postwar economic growth. Under the Bretton Woods system, the only currency that was to be convertible to gold was the dollar. Other countries set their exchange rates relative to the dollar. So, the dollar was set against gold at $35 per ounce, and then each country determined its exchange rate relative to the dollar. Devaluations were not allowed for competitive purposes, and a country couldn’t devalue its currency by more than 10 percent without IMF approval.

What Institutions Were Established At Bretton Woods? The Bretton Woods agreement also established two multinational institutions The International Monetary Fund (IMF) to maintain order in the international monetary system through a combination of discipline and flexibility requiring fixed exchange rates stopped competitive devaluations and brought stability to the world trade environment fixed exchange rates imposed monetary discipline on countries, limiting price inflation in cases of fundamental disequilibrium, devaluations were permitted the IMF lent foreign currencies to members during short periods of balance-of-payments deficit, when a rapid tightening of monetary or fiscal policy would hurt domestic employment As part of the Bretton Woods agreement, two multinational institutions were established. The first, the International Monetary Fund or IMF, was designed to maintain order in the international monetary system. The goal of the second, the World Bank, was to promote general economic development. Why was the IMF important? The IMF, using a combination of flexibility and discipline, was responsible for executing the main objectives of the Bretton Woods agreement, with the goal of avoiding the chaos that occurred during the time between the wars. Let’s talk a bit more about the discipline imposed by the IMF. The fixed exchange rate system provides discipline in two ways. First, the need to maintain a fixed exchange rate limits competitive devaluations and brings stability to the world trade environment. Second, because the system imposes monetary discipline on countries, inflation is limited. So, fixed exchange rates help control inflation and force economic discipline on countries. Why was flexibility important? Well, representatives at the meeting recognized that a rigid policy of fixed exchange rates would be too inflexible in a more global world. So, instead, the IMF created a fund using contributions from members that gave it the ability to lend foreign currencies to members to tide them over during short term balance of payments deficits when implementing a rapid tightening of monetary or fiscal policy would harm the domestic employment situation.

What Institutions Were Established At Bretton Woods? The World Bank to promote general economic development - also called the International Bank for Reconstruction and Development (IBRD) Countries can borrow from the World Bank in two ways under the IBRD scheme, money is raised through bond sales in the international capital market borrowers pay a market rate of interest - the bank's cost of funds plus a margin for expenses. through the International Development Agency, an arm of the bank created in 1960 IDA loans go only to the poorest countries What was the purpose of the World Bank? The World Bank, or as it’s officially known, the International Bank for Reconstruction and Development, was initially designed to lend money to help rebuild Europe, but shifted its role to helping Third World nations after the Marshall Plan was implemented. The World Bank makes loans in two ways. The first method involves raising money through bond sales in the international capital market. Borrowers pay a market rate of interest which is calculated based on the bank’s cost plus expenses. The second method, which is overseen by the International Development Agency, raises money through subscriptions from wealthy members like the U.S. These loans only go to very poor countries which have 50 years to repay at a 1 percent per year rate of interest.

Why Did The Fixed Exchange Rate System Collapse? Bretton Woods worked well until the late 1960s It collapsed when huge increases in welfare programs and the Vietnam War were financed by increasing the money supply and causing significant inflation Other countries increased the value of their currencies relative to the U.S. dollar in response to speculation the dollar would be devalued However, because the system relied on an economically well managed U.S., when the U.S. began to print money, run high trade deficits, and experience high inflation, the system was strained to the breaking point – the U.S. dollar came under speculative attack How successful was the Bretton Woods system? Bretton Woods worked well until the late 1960s when it began to collapse. Under President Johnson, the U.S. began to finance increases in its welfare program and the costs related to the Vietnam War by increasing the money supply. Recall that an increase in the money supply leads to price inflation. This led to a deterioration of the U.S. foreign trade position, and speculation that the dollar would have to be devalued. However, remember that under the Bretton Woods system, devaluing the dollar meant that all other currencies would have to be revalued—a prospect that wasn’t appealing to other countries that would see the price of their products rise relative to American products! In 1971, President Nixon announced that the dollar would no longer be convertible to gold, and that a 10 percent tariff on all imports would be implemented unless countries agreed to revalue their currencies. The dollar was eventually devalued by about 8 percent, but problems continued to persist. The U.S. continued to expand its money supply, run high trade deficits, and experience high inflation. The Bretton Woods system was only viable when the U.S. inflation rate was low, and the U.S. did not run a balance of payments deficit, and so it collapsed, and currencies began to float against each other.

What Was The Jamaica Agreement? A new exchange rate system was established in 1976 at a meeting in Jamaica The rules that were agreed on then, are still in place today Under the Jamaican agreement floating rates were declared acceptable gold was abandoned as a reserve asset total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion – today they are about $300 billion What happened next? After the collapse of Bretton Woods, IMF members got together in 1976 in Jamaica to formalize the new floating exchange rate system. Under the Jamaica Agreement, floating rates were deemed acceptable, gold was abandoned as a reserve asset, and IMF quotas, or the amounts that countries contributed to the IMF, were increased.

What Has Happened To Exchange Rates Since 1973? Since 1973, exchange rates have been more volatile and less predictable than they were between 1945 and 1973 because of the 1971 oil crisis the loss of confidence in the dollar after U.S. inflation in 1977-78 the 1979 oil crisis the rise in the dollar between 1980 and 1985 the partial collapse of the European Monetary System in 1992 the 1997 Asian currency crisis What has happened to the international monetary system since then? Since 1973, exchange rates have become more volatile and less predictable for several reasons including the 1971 oil crisis, the loss of confidence in the dollar that came after the U.S. inflation rate spiked in 1977-78, the 1979 oil crisis that doubled the price of oil, the unanticipated rise in the dollar between 1980 and 1985, the partial collapse of the European Monetary System in 1992, and the 1997 Asian currency crisis that saw various Asian currencies lose between 50 and 80 percent of their value!

What Has Happened To Exchange Rates Since 1973? Major Currencies Dollar Index, 1973-2008 Here you can see how the value of the U.S. dollar has fluctuated against an index of major trading currencies between 1973 and 2008.

Which Is Better – Fixed Rates Or Floating Rates? Floating exchange rates provide Monetary policy autonomy removing the obligation to maintain exchange rate parity restores monetary control to a government Automatic trade balance adjustments under Bretton Woods, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, the IMF would have to agree to a currency devaluation Which type of system is better? A fixed exchange rate system or a floating exchange rate system? Because of the volatile nature of the floating exchange rate system, there’s been renewed interest in a fixed exchange system in recent years. It’s hard to say whether a fixed exchange rate system is best or whether a floating exchange rate system is best. A floating exchange rate system offers monetary policy autonomy and automatic trade balance adjustments. Let’s look at the arguments for each type of system more closely. Supporters of floating exchange rates note that governments gain control over their monetary policy when they don’t have to maintain exchange rate parity. Why is this important? Well, suppose a government wanted to stimulate domestic demand to reduce domestic employment. Under a floating exchange rate system, the government could choose to expand the money supply to encourage people to buy more without worrying about maintaining parity. But, under a fixed exchange rate system, the government doesn’t have this ability because it has to maintain exchange rate parity. In addition, advocates of floating exchange rates point out the automatic trade balance adjustments that are part of the system are important. Under the fixed exchange rate system, if a country couldn’t correct a balance of payments deficit using domestic policy, it was required to get IMF approval to devalue its currency. But, under a floating exchange rate system, the trade balance would be automatically corrected. For example, if a country is running a trade deficit, buying more than it sells, the outflow of money will eventually lead to a depreciation of its currency. This depreciation will make its goods cheaper in foreign markets, and imports more expensive, and the trade deficit should eventually correct itself.

Which Is Better – Fixed Rates Or Floating Rates? But, a fixed exchange rate system Provides monetary discipline ensures that governments do not expand their money supplies at inflationary rates Minimizes speculation causes uncertainty Reduces uncertainty promotes growth of international trade and investment Why do some people calling for a return to fixed exchange rates? The answer to this question lies in arguments about monetary discipline, uncertainty, and the lack of connection between trade balances and exchange rates. Supporters of fixed exchange rates argue that the monetary discipline required by a fixed exchange rate system ensures that governments will not expand their money supplies at inflationary rates. Advocates of fixed exchange rates also note that the speculation that occurs with floating exchange rate regimes can cause currency fluctuations. For example, the dollar fluctuated sharply in the 1980s, and critics of floating regimes argue that this was the result of speculation not comparative inflation rates or trade deficits. Similarly, when speculation about a currency is high, the uncertainty that is part of a floating exchange rate system also becomes apparent. For companies, this uncertainty makes planning more challenging than it would be under a predictable fixed exchange rate system. Finally, advocates of floating exchange rates argue that floating rates help adjust trade imbalances, but critics argue that this link may not really be true. Instead, they claim trade deficits reflect the balance between savings and investment in a country.

Who Is Right? There is no real agreement as to which system is better A fixed exchange rate regime modeled along the lines of the Bretton Woods system will not work But a different kind of fixed exchange rate system might be more enduring and might foster the kind of stability that would facilitate more rapid growth in international trade and investment Who is right? Is a fixed exchange rate system better, or should we have a floating exchange rate system? So, far, economists can’t agree on an answer. We know that a Bretton Woods type of system won’t work, but a different type of fixed exchange rate system might be an option, particularly if it facilitates growth in international trade and investment.

What Type of Exchange Rate System Is In Practice Today? Various exchange rate regimes are followed today 14% of IMF members follow a free float policy 26% of IMF members follow a managed float system 28% of IMF members have no legal tender of their own the remaining countries use less flexible systems such as pegged arrangements, or adjustable pegs Recall from our discussion at the beginning of the chapter that currently, there are several types of exchange rate systems in place, including managed floats, free floats, pegged arrangements and adjustable pegs. Today, about 14 percent of IMF members follow a free float policy, 26 percent follow a managed float, 28 percent have no legal tender of their own like the EU countries that have adopted the euro, and the remaining countries use less flexible systems like pegged arrangements or adjustable pegs.

What Type of Exchange Rate System Is In Practice Today? Exchange Rate Policies, IMF Members, 2006 Here you can see the breakdown of exchange rate policies among IMF members.

What Is A Pegged Rate System? A country following a pegged exchange rate system, pegs the value of its currency to that of another major currency popular among the world’s smaller nations adopting a pegged exchange rate regime can moderate inflationary pressures in a country How does a pegged exchange rate system work? Countries under a pegged exchange rate system link the value of their currency to a major currency like the dollar. As we mentioned earlier the Opening Case describes the pegged system used by Latvia. Pegged arrangements are popular among the world’s smaller nations like Belize. Countries adopt this type of system because, in theory, it imposes monetary discipline and leads to low inflation, however an IMF study showed that pegged regimes don’t actually moderate inflationary pressures.

What Is A Currency Board? Countries using a currency board commit to converting their domestic currency on demand into another currency at a fixed exchange rate the currency board holds reserves of foreign currency equal at the fixed exchange rate to at least 100% of the domestic currency issued the currency board can issue additional domestic notes and coins only when there are foreign exchange reserves to back them What is a currency board? When a country adopts a currency board it commits to converting its domestic currency on demand into another currency at a fixed exchange rate. Hong Kong was successful with this type of arrangement during the Asian crisis in 1997. Hong Kong backed its currency 100 percent by the dollar, and was able to withstand several speculative attacks.

What Is The Role Of The IMF Today? Today, the IMF focuses on lending money to countries in financial crisis A currency crisis occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency, or forces authorities to expend large volumes of international currency reserves and sharply increase interest rates in order to defend prevailing exchange rates A banking crisis refers to a situation in which a loss of confidence in the banking system leads to a run on the banks, as individuals and companies withdraw their deposits A foreign debt crisis is a situation in which a country cannot service its foreign debt obligations, whether private sector or government debt Now, let’s look at some of the major financial crises that have rocked the international monetary system, and how the IMF has handled them. Remember, the IMF was originally established to help maintain the exchange rate system that was set at Bretton Woods. Today, however, many of the original reasons for its existence are no longer there. So, the IMF has redefined its mission, and focuses on lending money to countries that are in financial crisis. For example, the IMF lent money to several Asian countries in 1997. What is a financial crisis? A currency crisis occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation in the currency, or forces the government to expend large amounts of international currency reserves and sharply increase interest rates in an effort to maintain the prevailing exchange rate. A banking crisis refers to a situation in which a loss of confidence in the banking system leads to a run on the banks when everyone withdraws their deposits. A foreign debt crisis is a situation in which a country can no longer service its foreign debt obligations. Sometimes these crises occur simultaneously like they did in the 1997 Asian crisis and the 2000-2002 Argentinean crisis. IMF data show that developing countries are far more likely to experience a currency crisis than developed countries.

What Was The Mexican Currency Crisis Of 1995? The Mexican currency crisis of 1995 was a result of high Mexican debts a pegged exchange rate that did not allow for a natural adjustment of prices To keep Mexico from defaulting on its debt, the IMF created a $50 billion aid package required tight monetary policy and cuts in public spending Let’s explore two recent financial crises-- the Mexican crisis of 1995, and the Asian crisis of 1997. We’ll begin with the Mexican crisis. The crisis in Mexico was the result of high debt and a pegged exchange rate that didn’t allow for the natural adjustment of prices. Mexico’s pegged currency was the result of its 1982 financial crisis that had required an IMF bailout. The IMF believed that the peg was necessary to limit growth in the money supply and to contain inflation. However, by the mid-1980s, producer prices had risen significantly in Mexico without a corresponding adjustment in the exchange rate. By the mid-1990s, Mexico’s trade deficit was $17 billion, and investors, reassured by the government’s pledge to maintain the peg, poured money into the country. Eventually though, currency traders concluded that a devaluation of the peso was necessary, and began to dump the currency. The government, after initially trying to maintain the exchange rate, suddenly devalued the peso, which combined with other selling, added up to a 40 percent drop in value! At this point, the IMF stepped in to provide assistance and help the country get back on track.

What Was The Asian Currency Crisis? The 1997 Southeast Asian financial crisis was caused by events that took place in the previous decade including An investment boom - fueled by huge increases in exports Excess capacity - investments were based on projections of future demand conditions High debt - investments were supported by dollar-based debts Expanding imports – caused current account deficits What caused the Southeast Asian crisis? The causes of the financial crisis that swept across Southeast Asia in 1997 were actually the result of various factors that had occurred in the previous decade. During the decade prior to the crisis, huge increases in exports helped to fuel a boom in commercial and residential property, industrial assets, and infrastructure. While some of the investment made sense, a lot of it was based on unrealistic expectations about future demand, and so, there was a significant amount of excess industrial and office capacity as a result.

What Was The Asian Currency Crisis? By mid-1997, several key Thai financial institutions were on the verge of default speculation against the baht Thailand abandoned the baht peg and allowed the currency to float The IMF provided a $17 billion bailout loan package required higher taxes, public spending cuts, privatization of state-owned businesses, and higher interest rates Things came to head in Thailand in mid-1997 when it became evident that several key financial institutions were on the brink of default. They had made loans to companies that weren’t being repaid, making it difficult to meet their own debt obligations. Speculation about the baht was high, and short selling began. Initially, the Thai government tried to defend its currency, but then more or less gave up, and allowed the baht to float against the dollar. The value of the baht dropped by 55 percent!

What Was The Asian Currency Crisis? Speculation caused other Asian currencies including the Malaysian Ringgit, the Indonesian Rupaih and the Singapore Dollar to fall These devaluations were mainly driven by excess investment, high borrowings, much of it in dollar denominated debt, and a deteriorating balance of payments position The IMF provided a $37 billion aid package for Indonesia required public spending cuts, closure of troubled banks, a balanced budget, and an end to crony capitalism The IMF provided a $55 billion aid package to South Korea required a more open banking system and economy, and restraint by chaebol Thailand turned to the IMF for help, but speculation continued to affect the region, and the currencies of Malaysia, Indonesia, and Singapore all fell. Traders were worried than many of the same factors that affected Thailand like excess investment, high levels of debt, and trade deficits would also cause distress in other parts of Asia, and so, dumped those currencies as well causing the countries to also turn to the IMF for assistance.

How Has The IMF Done? By 2008, the IMF was committing loans to 65 countries in economic and currency crisis All IMF loan packages require a combination of tight macroeconomic policy and tight monetary policy However, critics worry the “one-size-fits-all” approach to macroeconomic policy is inappropriate for many countries the IMF is exacerbating moral hazard - when people behave recklessly because they know they will be saved if things go wrong the IMF has become too powerful for an institution without any real mechanism for accountability But, as with many debates about international economics, it is not clear who is right How well has the IMF done? In 2008, it was committed to helping 65 countries. All of its packages come with conditions that typically involve tight macroeconomic policy and tight monetary policy. However, not everyone thinks this is the right policy to take. You can see the package that was given to Turkey in the Country Focus in your text. The IMF has been criticized for having a one-size-fits-all approach to macroeconomic policy. Critics argue that what might be right for one country isn’t necessarily best for another country. For example, many critics felt that applying the same policies that were used for countries with excessive government spending in Asia, where there was significant private sector debt, was not appropriate. Critics have also complained that the IMF has been exacerbating moral hazard which occurs when people behave recklessly because they know they’ll be saved if things go wrong. In other words, because the IMF provides a safety net, countries may not always make the best decisions for their economies. For example, banks in Japan were willing to extend loans to overextended Asian companies during the 1990s when they shouldn’t have. Finally, there is concern that the IMF has too much power, and too little accountability. Keep in mind, that while the IMF has its detractors, it also has its supporters.

What Does The Monetary System Mean For Managers? Managers need to understand how the international monetary system affects Currency management - the current system is a managed float - government intervention can influence exchange rates speculation can also create volatile movements in exchange rates Business strategy - exchange rate movements can have a major impact on the competitive position of businesses need strategic flexibility Corporate-government relations - businesses can influence government policy towards the international monetary system companies should promote a system that facilitates international growth and development For managers, understanding the international monetary system is important for currency management, business strategy, and corporate-government relations. Let’s talk about each one. Companies must realize that the foreign exchange system that’s currently in place is a mixed system where government intervention and speculation can influence exchange rates. Speculative buying and selling of currencies can create a volatile situation that companies need to protect themselves against. Remember that while exchange rate movements can be difficult to predict, they can have a significant impact on business. Recall also that while individual transactions can be hedged through the forward market, firms need to maintain strategic flexibility to protect against economic exposure. In 2007, many companies faced the challenge of dealing with a weak dollar. Some foreign suppliers decided that rather than risk trying to pass the effects of the declining dollar on to consumers in the form of higher prices, they’d simply accept a smaller profit margin instead. Finally, companies need to keep in mind that they can influence a government’s policy towards the international monetary system. Exporters in the U.S. for example, have lobbied for devaluations in the dollar to make exports more attractive in foreign markets. In 2007, though the U.S. officially supported a strong dollar, its lack of intervention in the market to support a weakening dollar presented a challenge to many companies.

Review Question A ________ exchange rate system exists when the foreign exchange market determines the relative value of a currency. a) Fixed b) Floating c) Pegged d) Market Now, let’s see how well you understand the material in this chapter. I’ll ask you a few questions. See if you can get them right. Ready? ________ exchange rate system exists when the foreign exchange market determines the relative value of a currency. a) Fixed b) Floating c) Pegged d) Market The answer is b.

Review Question What type of exchange rates system was the gold standard? a) Fixed b) Floating c) Pegged d) Market What type of exchange rates system was the gold standard? a) Fixed b) Floating c) Pegged d) Market The answer is a.

Review Question Which agreement deemed floating exchange rates to be acceptable? a) The Bretton Woods Agreement b) The Gold Standard c) The Jamaica Agreement d) The Louvre Accord Which agreement deemed floating exchange rates to be acceptable? a) The Bretton Woods Agreement b) The Gold Standard c) The Jamaica Agreement d) The Louvre Accord The answer is c.

Review Question Which type of exchange rate system do most IMF countries follow today? a) Free float b) Managed float c) Fixed peg d) Adjustable peg Which type of exchange rate system do most IMF countries follow today? a) Free float b) Managed float c) Fixed peg d) Adjustable peg The answer is b.

Review Question A _________ is a situation in which a country cannot service its foreign debt obligations, whether private sector or government debt. a) currency crisis b) banking crisis c) foreign debt crisis d) foreign exchange crisis A _________ is a situation in which a country cannot service its foreign debt obligations, whether private sector or government debt. a) currency crisis b) banking crisis c) foreign debt crisis d) foreign exchange crisis The answer is c.

Review Question Managers need to understand the implications of changing exchange rates from all of the following perspectives except A) corporate-governance relations B) business strategy C) foreign relations D) currency management Managers need to understand the implications of changing exchange rates from all of the following perspectives except A) corporate-governance relations B) business strategy C) foreign relations D) currency management The answer is c.