Business Final Exam

Topics: Foreign exchange market, Marketing, Currency Pages: 14 (4575 words) Published: March 19, 2013
Chapter #10
International Monetary System: Institutional arrangements that countries adopt to govern exchange rates. Floating exchange: exists when a country allows the foreign exchange market to determine the relative value of a currency. Pegged exchange rate: means the value of the currency is fixed relative to a reference currency. Fixed exchange: rate system exists when countries fix their currencies against each other. Value of the currency: is determined by market forces.

The gold standard: had its origin in the use of gold coins as a medium of exchange, unit of account, and store of value. Is pegging currencies to gold and guaranteeing convertibility. Gold per value: the amount of a currency needed to purchase one ounce of gold . Balance-of-trade equilibrium: when the income its residents earn from exports is equal to the money its residents pay to other countries for imports. The Bretton Woods System: it established two multinational institutions: the International Monetary Fund (IMF) and the World Bank. The task of the IMF would be to maintain order in the international monetary system and that of the World Bank would be to promote general economic development. The aim of the Bretton Woods System: was to try to avoid a repetition of that chaos through a combination of discipline and flexibility. The official name for the World Bank is the International Bank for Reconstruction and Development. The bank lends money under two schemes: * Under the IBRD scheme

* International Development Association (IDA)
Bretton Woods System worked well until the late 1960’s. It collapse when huge increases in welfare programs and the Vietnam War were financed by increasing the money supply. The Floating Exchange Rate Regime: it was formalizes in January 1979 when IMF members met in Jamaica and agreed to the rules for the international monetary system that are in place today. The main elements of the Jamaica agreement include the following: * Floating rates were declared acceptable.

* Gold was abandoned as a reserve asset.
* Total annual IMF quotas were increased.
The case in support of floating exchange rates has two main elements: * Monetary Policy Autonomy.
* Trade Balance Adjustments.
The case for fixed exchange rates:
* Monetary Discipline: prevents high price inflation.
* Speculation
* Uncertainty
* Trade Balance Adjustments
Who is better? A different kind of fixed exchange rate system might be more enduring and might foster the stability that would facilitate more rapid growth in international trade and investment. 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. Currency Crisis: occurs when a speculative attack on the exchange value of a currency results in a sharp depreciation of its value. Banking Crisis: refers to a loss of confidence in the banking system that leads to a run on banks. Foreign Debt Crisis: is a situation in which a country cannot service its foreign debt obligations, whether private-sector or government debt. Chapter 11

The rapid globalization of capital markets now facilitates the free flow of money around the world, enabling individuals and institutions based in one nation to invest in corporations based elsewhere with relative ease. A capital market brings together those who want to invest money and those who want to borrow money. Market Markers are the financial service companies that connect investors and borrowers, either directly or indirectly. Capital market loans to corporations are either equity loans or debt loans: * Equity loans: in made when a corporation sells stock to investors. * Debt loans: requires the corporation to repay a predetermined portion of the loan amount. Borrowers benefit from:

* The...
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