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Monetary System

Understanding Money Money Exchange Rate Modern Monetary system

Money is a token that is widely accepted as a medium of exchange. The token can be tangible like a coin or note, or intangible like a bank deposit.

Understanding Money

Commodity Money Money using valuable commodity as token (such as gold)

Representative Money Physical tokens (coins, certificate etc) that can be reliably exchanged for a fixed quantity of a commodity such as gold
Fiat Money Intrinsically worthless, inconvertible token endowed with special status by the government to make them viable as money

Understanding Money

Exchange Rate
Exchange rates are quoted as foreign currency per unit of domestic currency or domestic currency per unit of foreign currency.
How much can be exchanged for one euro? 102/1 How much can be exchanged for one yen? 0.0098/1

Exchange rate allow us to denominate the cost or price of a good or service in a common currency.
How much does a Honda cost? 3,000,000 Or, 3,000,000 x 0.0098/1 = 29,400

Money Exchange Rate

Purchasing Power Parity Theory

A method of calculating exchange rates that attempts to value currencies at rates such that each currency will buy an equal basket of goods. Creates a balance in trade. When a country has an inflation, its currency depreciates.

Money Exchange Rate

Import demand

Export demand

Tariffs and quotas

Other factors affecting exchange rates


Money Exchange Rate

In the 19th and early 20th centuries gold played a key role in international monetary transactions. The gold standard was used to back currencies; the international value of currency was determined by its fixed relationship to gold. 19th Century Gold Standard 1 oz of gold = $20 = 4
Liberty Gold Dollar (1849-1854)
1 = $5

Modern Monetary System

Bretton Woods Agreement 1944 Established a system of fixed exchange rates.

Modern Monetary System

1960s inflation hit US resulted in President Nixon Closes the Gold Window in year 1971 Nixon refuses to honor agreement signaling the beginning of the end of fixed exchange rates.

Modern Monetary System

The Effect of Exchange Rate Interventions

Central Banks enters into forex market to influence value of currency. Tendency of competition to keep value high. Central Banks enter into forex market and then conducts open market operation to keep money supply constant. The speculative activities of world currencies

Modern Monetary System

In 1997 speculative short-selling of the Malaysian currency The value of the ringgit dropped from MYR 2.50 per USD to MYR 4.80 per USD. Bank Negara imposed capital controls and pegged the Malaysian ringgit at USD 3.80. The fixed exchange rate was abandoned on July 21, 2005. The Ringgit was made into floating system but to be traded with strict permission from Bank Negara.

Asian Financial Crisis