International Finance 02

The international monetary system can be defined as the institutional framework within which:

• international payments are made
• movement of capital is accommodated
• exchange rates among currencies are determined
• all of the above

The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows (i)- Bimetallism (ii)- Bretton Woods system (iii)- Classical gold standard (iv)- Flexible exchange rate regime (v)- Interwar period The chronological order that they actually occurred is:

• (iii), (i), (iv), (ii), and (v)
• (i), (iii), (v), (ii), and (iv)
• (vi), (i), (iii), (ii), and (v)
• (v), (ii), (i), (iii), and (iv)

In the 1850s the French franc was valued by both gold and silver, under the official French ratio which equated a gold franc to a silver franc 15½ times as heavy. At the same time, the gold from newly discovered mines in California poured into the market, depressing the value of gold. As a result,

• The franc effectively became a silver currency.

• The franc effectively became a gold currency.

• Silver became overvalued under the French official ratio

• Answers a) and c) are correct

Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment.

• Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.

• Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce.

• a) and b) both work

• none of the above

Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 6 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system?

• 1 German mark = $2

• 1 German mark = $0.50

• 1 German mark = $45

• 1 German mark = $1

Suppose that the British pound is pegged to gold at £6 per ounce, whereas one ounce of gold is worth €12. Under the gold standard, any misalignment of the exchange rate will be automatically corrected by cross border flows of gold. Calculate the possible savings for buying €1,000, if the British pound becomes undervalued and trades for €1.80. (Assume zero shipping costs). (Hint: Gold is first purchased using the devalued British pound from the Bank of England, then shipped to France and sold for €1,000 to the Bank of France).

• £55.56

• £65.56

• £75.56

• £85.56

Suppose that Britain pegs the pound to gold at six pounds per ounce, whereas the exchange rate between pounds and U.S. dollars is $5 = £1. What should an ounce of gold be worth in U.S. dollars?

• 29.4

• 30

• 0.83

• 1.2

During the period between World War I and World War II

• The major European powers and the U.S. returned to the gold standard and fixed exchange rates.
• While most countries abandoned the gold standard during World War I, international trade and investment flourished during the interwar period under a coherent international monetary system.
• The U.S. dollar emerged as the dominant world currency, gradually replacing the British pound for the role.
• None of the above.

Under the Bretton Woods system

• there was an explicit set of rules about the conduct of international monetary policies
• each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary
• the U.S. dollar was the only currency that was fully convertible to gold
• all of the above

Special Drawing Rights (SDR) are:

• an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF
• a “portfolio” of currencies, and its value tends to be more stable than the currencies that it is comprised of
• used in addition to gold and foreign exchanges, to make international payments
• all of the above