Multinational Business Finance Chatper One Qestion Answer

Topics: Currency, Foreign exchange market, Bretton Woods system Pages: 4 (2218 words) Published: June 13, 2012
End-of-Chapter Question Solutions 1 ____________________________________________________________________________________________

1. The gold standard and the money supply. Under the gold standard all national governments promised to follow the “rules of the game”. This meant defending a fixed exchange rate. What did this promise imply about a country’s money supply? A country’s money supply was limited to the amount of gold held by its central bank or treasury. For example, if a country had 1,000,000 ounces of gold and its fixed rate of exchange was 100 local currency units per ounce of gold, that country could have 100,000,000 local currency units outstanding. Any change in its holdings of gold needed to be matched by a change in the number of local currency units outstanding. 2. Causes of devaluation. If a country follows a fixed exchange rate regime, what macroeconomic variables could cause the fixed exchange rate to be devalued? The following macroeconomic variables could cause the fixed exchange rate to be devalued:


An interest rate that is too low compared to other competing currencies A continuing balance of payments deficit An inflation rate consistently higher than in other countries

Fixed versus flexible exchange rates. What are the advantages and disadvantages of fixed exchange rates?



Fixed rates provide stability in international prices for the conduct of trade. Stable prices aid in the growth of international trade and lessen risks for all businesses. Fixed exchange rates are inherently anti-inflationary, requiring the country to follow restrictive monetary and fiscal policies. This restrictiveness, however, can often be a burden to a country wishing to pursue policies that alleviate continuing internal economic problems, such as high unemployment or slow economic growth. Fixed exchange rate regimes necessitate that central banks maintain large quantities of...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Business Finance Essay
  • finance Essay
  • Multinational Business Finance Essay
  • Essay on multinational finance
  • Essay about Questions and Answers: Personal Finance
  • Business and Correct Answer Essay
  • Business Finance DDM model Essay
  • Business Policy/Finance Essay

Become a StudyMode Member

Sign Up - It's Free