1.  Eliminate balance of payments deficit or surplus  Disadvantages of flexible exchange rates  Uncertainty and diminished trade  Terms-of-trade changes  The challenges to managing and designing domestic macroeconomic policies LO4 21-1 1 ©2013 McGraw-Hill Ryerson Ltd. Chapter 17, LO3

2.  Government intervention  Use of reserves  Trade policies  Exchange controls and rationing  Distorted trade  Favoritism  Restricted choice  Black markets  Macroeconomic adjustments LO4 21-2 2 ©2013 McGraw-Hill Ryerson Ltd. Chapter 17, LO4

3.  Gold standard 1879-1934  Fixed exchange rate system  Bretton Woods 1944-1971  Fixed exchange rate system indirectly tied to gold  Managed float 1971-present LO4 21-3 3 ©2013 McGraw-Hill Ryerson Ltd. Chapter 17, LO5

4.  Current system (1971 to present)  “Almost” flexible system  Considerably more volatile than under Bretton Woods  G8 collectively intervene to stabilise currencies  Proponents and critics  Has functioned better than anticipated  A “nonsystem”  Most economists favour its continuation LO4 21-4 4 ©2013 McGraw-Hill Ryerson Ltd. Chapter 17, LO5