Chap 3 International Monetary System+

Chapter 3
The International Monetary

System
A member of the
La Consolacion College Tanauan Unified La Consolacion College
– South Luzon
INTERNATIONAL MONETARY SYSTEM
This refers to the institutional

arrangements that govern
exchange rates.
A member of the
– South Luzon
Two major international institution in the International
Monetary System (John Maynard Keynes)
International Monetary Fund (IMF) World Bank
Given the task to maintain order in the Responsible in promoting development
international monetary system
Main goal is short term -- to help Main goal is long term like eradication
country who is in trouble and could not of poverty by funding specific projects
get money by other means for example, which help them reach these goals
a certain country’s economy collapsed especially in poor countries.
or their currency is in danger.
Act as lender where you go to when no Act as a lender also, however, their
one is lending you money reputation has been related to lending
corrupt government or dictators and
also imposing ineffective policies to get
their money back.
A member of the
– South Luzon
FLOATING EXCHANGE RATE
- This means that the value of currency is determined
by the market forces of demand and supply in the
foreign exchange market.
- There is no government and central bank
intervention to influence the value of currency.
Value of currency rises = appreciation of value

Value of currency falls = depreciation of value
A member of the
– South Luzon
FACTORS INFLUENCING DEMAND AND SUPPLY FOR A
CURRENCY
DEMAND SUPPLY
1. The demand for goods and Ex: Increase in US Demand for dollar is met by
services produced by another goods/products attractiveness supplying British pounds.
nation to British consumers will result
to an increase in demand for If Americans increase their
dollar. demand for pound, they must
supply dollars in exchange.
2. Relative price levels When the price of the product If UK price level falls relative to
is low, the demand for the the US, British goods will be
product will increase and thus, more price competitive and
demand for dollar will also thus,
increase resulting to
appreciation of dollar and vice If Americans demands for
versa. British goods and services, they
need pounds
A member of the
– South Luzon
FACTORS INFLUENCING DEMAND AND SUPPLY FOR A CURRENCY
DEMAND SUPPLY
3. Interest rates If interest rates are high in other If its more rewarding to save in the UK,
countries, this could attract money flows then Americans will increase their
in the US since foreign investors seeks deposits at UK financial institutions.
more attractive returns offered by
American banks. British depositors will
then change their pounds to dollar and
deposit them in the US.
In general, we can say that interest rates

have direct relationship with exchange
rates. Exchange rates tend to follow
movements of the interest rate.
4. Speculation (expectations Can result to an increase or decrease in If Americans believes that UK pound is
of currency traders) demand. currently undervalued and may rise value
in the future, they may choose to buy it
today in order to benefit from its rise in
the future.
A member of the
– South Luzon
A member of the
– South Luzon
Exchange Rate Decrease in Supply
A member of the
– South Luzon
FIXED EXCHANGE RATE
- It occurs when the government of a country fixes
the value of its currency, a basket of currencies or a
commodity such as gold.
- This means that the values of a set of currencies are
fixed against each other at some mutually agreed on
exchange rate.
A member of the
– South Luzon
Revaluation – occurs when a government
intervenes to increase the value of its currency.
Devaluation – occurs when a government

intervenes to decrease the value of its currency.
BRETTON WOODS SYSTEM

-Under this fixed exchange rate system, the value of
most currencies in terms of U.S. dollars was fixed for
long periods and allowed to change only under a
specific set of circumstances.
A member of the
– South Luzon
FIXED EXCHANGE RATE
ADVANTAGES DISADVANTAGES
Risk tied to exchange rate fluctuations are Lack of flexibility in responding to

minimized changing market conditions
Limited currency speculation Opportunity cost of reserves
Fluctuating interest rates may result to

conflicts with policy objectives
A member of the
– South Luzon
PEGGED EXCHANGE RATE
-This means that the value of currency is fixed relative
to a reference currency, such as the U.S. dollar, and
then the exchange rate between that currency and
other currencies is determined by the reference
currency exchange rate.
DIRTY FLOAT
-This is a situation when the value of currency is
determined by market forces but the central bank of a
country intervenes in the foreign exchange market to
maintain the value of its currency if it depreciates too
rapidly against an important reference currency.
A member of the
– South Luzon
END
A member of the
– South Luzon

Chap 3 International Monetary System+

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chap 3 International Monetary System+

Uploaded by

Copyright:

Available Formats

Chapter 3

The International Monetary

This refers to the institutional

Value of currency rises = appreciation of value

In general, we can say that interest rates

Devaluation – occurs when a government

BRETTON WOODS SYSTEM

Risk tied to exchange rate fluctuations are Lack of flexibility in responding to

Limited currency speculation Opportunity cost of reserves

Fluctuating interest rates may result to

You might also like