1. By Evan Krasnow

2.  Similar to the Gold standard but on larger scale  Commonly referred to as an Anchor Currency  A Reserve Currency is  A currency that a country fixes an exchange rate to  A currency held by a government in large quantities  Allows for cheaper trade  Allows the government to borrow money at a lower rate

3.  The US Dollar is the most widely used Reserve Currency, followed by the Euro  http://en.wikipedia.org/wiki/Template:Reser ve_currencies http://en.wikipedia.org/wiki/Template:Reser ve_currencies

4.  Consider the French franc is set at 5 per dollar  And the deutsche mark is set at 4 per dollar  So the exchange rate equaled  DM 0.8 per franc = (DM4/dollar)/(FFr5/dollar)  If the exchange rate was.85 there is room for profit.  (FFr 5 per dollar) x $100 = 500FFr  Sell the 500FFr x.85DM = DM425  425DM / 4DM per dollar = $106.25

5.  With N amount of countries, there are N-1 exchange rates against the reserve currency  So the reserve country bears no burden of financing its balance of payments.  This also allows the reserve-issuing country at an advantage  They can use their own monetary policy for macroeconomic stabilization because there are fixed exchange rates.

6.  Some major economists believe that a Single Reserve Currency will always dominate the market due to the Network Effect  Others think that this is not true. Barry Eichengreen argued that as long as a currency’s market is sufficiently liquid that the benefits of reserve diversification are strong and countries may move away from the single reserve system.