CRITICAL THINKING

AND DISCUSSION
QUESTIONS
QUESTION 1:
Why did the gold standard collapse? Is there a
case for returning to some type of gold standard?
What is it?
ANSWER 1:
 The gold standard worked reasonably well from
the 1870s until the start of World War I in 1914,
when it was abandoned.
 During the war several governments financed
their massive military expenditures by printing
money. This resulted in inflation, and by the
war's end in 1918, price levels were higher
everywhere.
 Several countries returned to the gold standard
after World War I. However, the period that
ensued saw so many countries devalue their
currencies that it became impossible to be
certain how much gold a currency could buy.
  Instead of holding onto another country's
currency, people often tried to exchange it into
gold immediately, lest the country devalue its
currency in the intervening period. This put
pressure on the gold reserves of various
countries, forcing them to suspend gold
convertibility.
 As a result, by the start of World War II, the
gold standard was dead. The great strength of
the gold standard was that it contained a
powerful mechanism for simultaneously
achieving balance-of-trade equilibrium by all
countries.
 This strength is the basis for reconsidering the
gold standard as a basis for international
monetary policy.
QUESTION 2:
What opportunities might current IMF lending
policies to Third World nations create for
international businesses? What threats might
they create?
ANSWER 2:
 The IMF lending policies require the recipient
countries to implement governmental reforms to
 stabilize monetary policy and encourage
economic growth.
 One of the principal ways for a developing
nation to spur economic growth is to solicit
foreign direct investment and to provide a
hospitable environment for the foreign
investors.
 These characteristics of IMF lending policies
work to the advantage of international
businesses that are looking for investment
opportunities in developing countries.

QUESTION 3:
Do you think the standard IMF policy
prescriptions of tight monetary policy and
reduced government spending are always
appropriate for developing nations experiencing
a currency crisis? How might the IMF change its
approach? What would the implications be for
international business?
Answer3:
 Critics argue that the tight macroeconomic
policies imposed by the IMF in the recent Asian
crisis are not well suited to countries that are
suffering not from excessive government
 spending and inflation, but from a private-sector
debt crisis with inflationary undertones.
 Anti-inflationary monetary policies and
reductions in government spending usually
result in a sharp contraction of demand, at least
in the short run.
Debate the relative merits of fixed and
floating exchange rate regimes. From the
perspective of an international business,
what are the most important criteria in a
choice between the systems? Which
system is more desirable for an
international business? Why?
Answer
Floating exchange rate give
monetary policy autonomy by
allowing the government to increase
or decrease its money supplied
when needed, it adjusts trade
balance. The fixed exchange rate
system controls high price inflation by
monetary discipline and also controls
speculation and uncertainty. Floating
rate system could be more effective
for international business, because it
is more stable in the exchange rate
which determined between supply
and demand, so there is less risks
of interventions. Under a floating
rate system domestic inflation
shouldn’t have an impact on business
international cost competitiveness. In
addition the forward exchange
market insurance against the risks of
exchange rate fluctuations. A fixed
system can influence trade and
investment by possible depreciation
of currencies and this can lead to
instability which would be negative
for profi tability sales and revenues.
Briefly describes the origins
and roles of the IMF and World
Bank using the Bretton Woods
system as a starting point. In
order to rebuild an international
economic system delegate of 44
allied nations gathered in
Bretton Woods. An agreement
at Bretton Woods established
two multinational institutions
the International Monetary Fund
(IMF) and the World Bank. The
main roles of the IMF would be to
maintain order in the international
monetary system, avoid competitive
devaluations and to control price
inflation and that of the World Bank
would be to promote general
economic development. In the 1950s
the World Bank In began lending
money to third world nations.
In1960s it began to lend heavily in
support of agriculture, education,
population ,control, and urban
development.