Special Drawing Rights
1) EUN Chapter 2 Question 8; Explain how special drawing rights
(SDR) are constructed. Also, discuss the circumstances under which the SDR was created
The SDR is a reserve asset and a denomination currency for international transactions. This reserve was allotted to the members of the IMF who could then use it for transactions amongs themselves or with the IMF. It comprises of four major currencies – the U.S. dollar, Euro, British pound and Japanese yen. It was created to alleviate the pressure on the U.S. dollar as a central reserve currency. In the 1960´s the total value of US gold stock fell short on foreign dollar holdings. It was created as an alternative for the US dollar because of the dollar becoming a less attractive foreign exchange asset due to an shortfall of US dollars. 2) EUN Chapter 2 Question 10; There are arguments for and against the alternative exchange rate regime.
a. List the advantages of the flexible exchange rate regime.
Easier external adjustments
National policy autonomy
Automatically removes disequilibrium of balance of payments
Promotes international trade
b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime. When future exchange rates are uncertain, businesses tend to shun foreign trade. Countries are not fully benefit from international trade under exchange rate uncertainty, recourses will be allocated suboptimal on a global basis.
Proponents of the fixed exchange rate regime are convinced that eliminating this uncertainty will promote international trade.
c. Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime.
Under the fixed exchange rate regime a country is deprived of its monetary independence. It requires a country to pursue a policy of monetary expansion or contraction in order to maintain stability in its rate of exchange. The fixed
(SDR) are constructed. Also, discuss the circumstances under which the SDR was created
The SDR is a reserve asset and a denomination currency for international transactions. This reserve was allotted to the members of the IMF who could then use it for transactions amongs themselves or with the IMF. It comprises of four major currencies – the U.S. dollar, Euro, British pound and Japanese yen. It was created to alleviate the pressure on the U.S. dollar as a central reserve currency. In the 1960´s the total value of US gold stock fell short on foreign dollar holdings. It was created as an alternative for the US dollar because of the dollar becoming a less attractive foreign exchange asset due to an shortfall of US dollars. 2) EUN Chapter 2 Question 10; There are arguments for and against the alternative exchange rate regime.
a. List the advantages of the flexible exchange rate regime.
Easier external adjustments
National policy autonomy
Automatically removes disequilibrium of balance of payments
Promotes international trade
b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime. When future exchange rates are uncertain, businesses tend to shun foreign trade. Countries are not fully benefit from international trade under exchange rate uncertainty, recourses will be allocated suboptimal on a global basis.
Proponents of the fixed exchange rate regime are convinced that eliminating this uncertainty will promote international trade.
c. Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime.
Under the fixed exchange rate regime a country is deprived of its monetary independence. It requires a country to pursue a policy of monetary expansion or contraction in order to maintain stability in its rate of exchange. The fixed