Book Title
Introduction to International Political Economy 6th Edition

978-0133402391 Chapter 7

April 10, 2020
The international monetary and financial structure is often embroiled with tensions that make it difficult to
manage. Currency exchange rates and transnational financial flows affect the success of many businesses and
industries. With globalization and deregulation of the global economy since the 1980s has come increased currency
exchanges and financial flows that influence employment, trade and foreign direct investment. Economic liberals
have liked this development, but globalization has its detractors who because of situations such as the recent global
financial crisis have supported measures to reregulate their societies along with the monetary and financial structure.
This chapter describes and explains a number of fundamental elements of the international monetary and
finance structure, including its basic institutions and who manages them, who determines its rules, why and how
these rules change, and finally, Cui bono? or who benefits from its structural framework. This subject has its own
specialized vocabulary that can present a formidable barrier to understanding some of its intricate elements. Once
instructors and students become familiar with some of the basic concepts and agencies associated with this structure,
both will realize that one element of it affects another.
The chapter makes six interconnected arguments. First, after World War II the United States and its allies
constructed a fairly tightly controlled international monetary and finance system that helped the United States could
pursue “hegemony on the cheap,” work toward the stabilization of Western capitalist economies, and contain
communism. Second, as some of the security and economic interests of the Western alliance changed, exchange
rates and capital controls were gradually allowed to reflect market conditions. At the same time, many states made
efforts to control direct economic growth in ways that gradually weakened the international monetary and finance
Third, since the end of the Cold War and pursuant to its continued hegemonic role in the international
political economy, the United States has continued to run huge deficits in the current account of its balance of
payments. Recently emerging economies such as China and Saudi Arabia have been investing their surplus capital in
the United States and other current account deficit nations. This has enabled the United States to cover its balance-
of-payments deficits. Fourth, the current financial crisis jeopardizes this U.S. strategy and continues to weaken U.S.
leadership of the current monetary and finance structure.
Fifth, the financial crisis has also severely weakened efforts by IOs, other states, and many
nongovernmental organizations (NGOs) to resolve problems in debtor countries as well as help the developing
nations overcome poverty. Sixth and finally, the global monetary and finance structure remains vulnerable to
fluctuating market conditions, which should lead to increased state cooperation to deal with a number of problems
that, if not resolved, could result in a global financial meltdown.
Learning Objectives:
To define, discuss, examine, analyze, and appreciate some of the intricate workings of the international
monetary and finance structure.
To define, discuss, and understand the role of currency exchange in this structure.
To understand how and why currency values appreciate and depreciate related to a variety of market, political,
and social conditions.
To understand the connection between exchange rates and international finance related to economic growth and
To define and discuss the connection between exchange rates and national interest rates, and to understand
some of the reasons why so much hot money is unregulated and often takes the form of foreign direct
investment (FDI) that moves throughout the increasingly global economy.
To also examine some of the positive and negative effects of those investments, especially on developing
nations who have incurred a good deal of debt since the later 1970s (and which is discussed in more detail in
several case studies in Chapter 8).
To define and outline the basic institutional and procedural elements of the Bretton Woods system, whose
original members founded the International Monetary Fund (IMF) to monitor and regulate exchange rates. Note
that that role has changed recently (See below).
To define and discuss the significance of three different types of international monetary and finance systems
that have existed since World War I: the Gold Standard, the Fixed Exchange Rate System, and the Flexible (or
Floating) Exchange Rate System.
To define, discuss, and understand the connection between the IMF and the balance of payments account in the
two later monetary and finance systems that have regulated the monetary and finance system since World War
To explain why these systems gradually became less effective and were replaced by another order or set of rules
and regulations.
To understand the Mundell Trilemma, whereby states cannot achieve more than two of three objectives at the
same time: economic independence, capital mobility, and stable exchange rates.
To explain why some experts feel that the U.S. dollar’s continuing weakness since the early 2000s may
contribute to a lack of confidence in the dollar, especially since the global economic crisis started in 2007.
Others argue that this is a temporary condition and that the dollar has and will remain strong against the value of
other currencies.
To explore some of the issues related to the relationship of the U.S. dollar to the European Union’s (EU) euro.
Is the recent strength of the euro permanent or temporary? Might the euro replace the U.S. dollar as the world’s
top currency?
To discuss the recent increase in the strength of the Chinese yuan and its impact on U.S. trade and investment
policies. Some U.S. officials argue that China is purposely keeping the value of its currency low to encourage
exports, which has undermined U.S. exports. Due to continuing economic interdependence between the United
States and China, and because China invests a good deal in U.S. Treasury Bills, China might not be interested in
pushing this trade strategy too far.
In conclusion, to summarize why economic philosophy and changing national goals have impacted the structure
of the international financial structure; why despite the appearance of a weaken state, national governments
retain a central role in this structure; and why globalization has generated a paradox where states are compelled
to aggressively compete with each other, which provokes demand for domestic protectionism. Of importance is
the paradoxical idea that these features of the international monetary and finance structure may be undermining
the economic features of this structure.
Chapter Outline:
a) We begin the chapter by explaining the role of exchange rates in the international political economy and
then move on to discuss three distinct international monetary and finance systems that have existed since
the nineteenth century.
b) The chapter moves to a discussion of the role of the U.S. dollar in the international political economy
c) Some experts are concerned that confidence in the world’s strongest currency has deteriorated, in part due
to the financial crisis.
d) The chapter concludes with an assessment of the management of the monetary and finance structure.
e) This discussion is also a conduit to Chapter 8, in which we analyze in more detail short-and long-term
international debt and two financial crises, including the recent global financial crisis.
f) This structure reflects a complex web of political and economic agreements, understandings, institutions,
and relationships that help determine the values of different national currencies in terms of other currencies,
and that establishes a set of rules as to how much, how often, and under what terms money moves into and
out of national economies.
g) With the background and knowledge this chapter provides, students should be able to grasp the essential
features of the international finance and exchange rate systems.
We have found this history to be especially useful to students because it makes the entire topic easier to
understand. In each period, we inquire into the major actors, the interplay of market forces and social
interests that shape policies, and what accounts for shifts from one system to another. Inter-spliced between
the first and second historical periods, we explain the role of the IMF and why its primary functions have
shifted over time. We also explain the balance-of-payment problem and its connection to management
functions of the IMF.
a) Foreign or currency exchange rates affect the value of everything a nation buys or sells on international
markets. It also impinges on the cost of credit and debt, and the value of foreign currencies held in national
and private banks.
b) A special vocabulary is used when discussing currency or foreign exchange.
c) Travelers and investors are often exposed to currency exchanges when they decide how much of their
national currency it will cost to buy or invest in another country.
d) Banks and investors buy and sell millions of dollars, British pound sterling, yen, euros, and other
currencies. A change in the value of one currency (contrast 2009 with 2012 in Table 7-1) can mean huge
gains or losses depending on how much market prices for currencies have changed in the recent past or
might change in the future. What concerns states the most are short- and long term shifts in the values of
certain currencies to one another (discussed in more detail later).
e) Currency values are relative to other currencies; for example, if the yendollar exchange rate is¥100 per 1
US$, then a ¥1,000 café latte at the Tokyo airport costs a U.S. tourist in Japan $10 (¥1,000 ÷ ¥100 per $ =
f) Currencies are considered to be either hard or soft. Hard currencies are widely traded and accepted for
international payments, while soft currencies are typically only accepted in their country or region of
g) The supply and demand for a currency determines its value.
h) Governments will often intervene in foreign exchange markets through national Central Banks by buying
and selling the nation’s currency to either strengthen or weaken its value.
i) The level of demand for U.S. dollars reflects the attempt of foreigners to buy U.S. goods, services, assets,
and travel to the United States.
j) As the quantity of dollars demanded increases, the dollar appreciates (increases in value relative to other
currencies), which makes U.S. goods less competitive (because more foreign currency is required to buy
the dollars needed to purchase the good).
k) The demand for dollars is also impacted by U.S. interest rates. A rise in U.S. interest rates relative to
foreign countries’ interest rates creates an incentive for foreigners to invest in interest-bearing assets in the
United States. This will increase the demand for U.S. dollars.
l) Slower inflation in the U.S. compared to other countries also increases the demand for dollars.
m) The supply of dollars reflects the desire of U.S. households, businesses, and government entities to buy
foreign goods and services, assets, and to travel in foreign countries.
n) The quantity of dollars supplied is directly related to the price of dollarsas the currency appreciates, it
has more purchasing power in foreign markets (foreign goods become less expensive).
o) The supply of dollars is also influenced by foreign interest rates, inflation, and business expectations
relative to those in the United States.
p) Speculation plays an important role in foreign exchange markets: currency speculators may invest in a
nation’s assets in anticipation of the nations currency appreciating. However, the increase in demand for
the foreign currency can actually generate the appreciation anticipated.
q) Flows of hot money (foreign investment in stocks and bonds not regulated by the state) can move in and
out of a country so fast and easily as to contribute to a financial and monetary crisis.
r) There are winners and losers when a nation’s currency changes value. In general importers gain from
currency appreciation, whereas exporters lose.
Since the nineteenth century, there have been three structures and sets of rules related to foreign exchange rates.
The Classic Gold Standard: Phase I
a) A fixed exchange-rate system that existed from the end of the nineteenth century until the end of World
War I.
b) Different currency values were each pegged (fixed) to the price of gold.
c) If a country experienced a balance of payment deficit (that is, it had more financial outflows than inflows
for trade, investment, etc.), it would sell its gold to earn money to pay for its deficits.
d) The collapse of the Gold Standard was precipitated by World War I, which turned Great Britain into a
debtor nation. Before the war, Great Britain was the world’s largest creditor and could loan money to other
countries to enable them to import goods when their economies slowed.
e) Another explanation for the end of the Gold Standard is that the expansion in elector franchise (the vote)
forced politicians to seek new tools for advancing their domestic economiesincluding a more flexible
The Bretton Woods System: The Qualified Gold Standard and Fixed Exchange Rates: Phase II
a) A set of institutions and ideas agreed to after World War II with the aim of encouraging the cooperation
needed to rebuild Western Europe and Japan. Officials viewed it as an imperative to create a currency
regime that would prevent the competitive currency devaluations that had precipitated tit-for-tat retaliation
during the Great Depression.
b) John Maynard Keynes proposed the “Keynesian compromise” which gave nations the ability to regulate
their own domestic economies, but permit the IMF to collectively manage international financial policies to
avoid another Great Depression.
c) US Treasury official Harry Dexter White succeeded in designing the International Monetary Fund (IMF)
so as to adopt a set of policies beneficial to the US as a creditor nation. These policies included the IMF
providing temporary assistance to allied-debtor nations to pay off their wartime debts.
d) Under pressure from the United States, the IMF adopted a fixed exchange-rate system where an ounce of
gold was valued at $35, and other national currencies were pegged to the dollar and only allowed to
fluctuate 1percent above or below the par value (or the fixed exchange rate) on any given day.
e) This system restored confidence in the finance structure since all currencies were theoretically convertible
into gold which they could redeem for their U.S. dollars.
f) The system subsisted on the basis of a political bargain between the U.S. and Western Europe where the
United States consciously accepted its hegemonic role of providing collective goods such as the dollar (as a
reserve currency) and security in exchange for military and diplomatic support from Europe.
a) The IMF was designed to be the central bankers’ central bank, creating stable and responsive international
financial relations.
b) The balance of payments offers an indication of a nation’s economic relations with the rest of the world.
c) The balance of payments is a record of a nation’s complete monetary inflows and outflows in a given year.
The balance of payments is generally divided into two accounts: the current account and the capital
d) A deficit in one of these accounts occurs when money outflows exceed money inflows. A surplus occurs
when money inflows exceed money outflows.
e) The current account is a nation’s checking account, recording earnings and expenses relating to
international transactions involving goods, services, investment income, and unilateral transfers.
f) The balance of trade is part of the current account; it measures the dollar value of imports and exports of
goods and service. It is a very incomplete measure of international transactions.
g) The capital account records money flows stemming from transactions involving existing assets, such as
stocks, bonds, and real estate. If a nation has a capital account surplus, it is selling more assets to foreign
residents than it is purchasing from them.
The Bargain Comes Unstuck
a) Governments will often intervene in foreign exchange markets through national Central Banks by buying
and selling the nations currency to impact its value.
b) But exporting inflation (foreign countries were compelled to buy up the excess dollars to keep their
currencies within approved trading bands) increased pressure on the United States to use its own gold to
buy up its excess dollars.
c) By the early 1970s, there were not enough U.S. gold reserves to cover all the dollars already in the
international system.
d) Diverging national interests had rendered the fixed exchange-rate system too rigid.
e) To prevent a domestic recession, President Nixon unilaterally decided to suspend the convertibility
between the dollar and gold, and devalued the dollar.
f) The relaxation of capital controls after 1971 allowed for the freer movement of money through financial
markets and an intense period of financial growth and investment expansion.
The Float or Flexible Exchange-Rate System: Phase III and the Changing Economic Structure
a) After the collapse of the Bretton Woods system, the major powers authorized the IMF to widen the trading
bands so that changes in currency values could more easily reflect the supply and demand of currencies.
b) The oil shocks of the 1970s helped preserve the dollar’s status as top currency, as OPEC demanded ever-
greater quantities of dollars to purchase OPEC oil.
c) OPEC nations placed many of these “petrodollars” in Western banks.
d) Petrodollars were loaned out to developing countries, which substantially increased their debt.
e) Stagflation (concurrent inflation and slow economic growth) during the 1980s prompted the U.S. to raise
interest rates to combat domestic inflation, which contributed to global recession.
f) This economic downturn motivated a turn away from Keynesian orthodoxy in favor of a return to classical
liberal “laissez-faire” ideology under Thatcher in the UK and Reagan in the U.S.
g) g) Concerned about the growth of communism in Latin and South America, the IMF and World Bank
under U.S. pressure provided opportunities for developing countries to reschedule their debts (accrued
during the petrodollar boom) in exchange for agreeing to structural adjustment policies.
h) By 1985, the United States had become the world’s biggest debtor nation, causing many to argue that the
U.S. dollar was overvalued.
i) As a result, the Plaza Accord committed the G-5 to working together to realign the dollar so that it would
depreciate in value against other currencies.
The Roaring Nineties: Globalization and the Weakening Dollar
a) By the end of Cold War, many of the remaining barriers to capital flows were removed and private capital
flows dwarfed official capital flows.
b) Increased capital flows allowed for the creation of technologies that further integrated national economies,
such as superfast computers and satellite communication networks.
c) International economic options came to be limited by the Mundell Trilemma which says that only two of
the following three goals are achievable at any one time: domestic economic independence, international
capital mobility, and stable (or fixed) exchange rates.
a) In hindsight, many believe that the global financial crisis was primarily caused by globalization and
capitalism that led to loose monetary policy, lax financial regulation, and the risks associated with real
estate investment.
b) As the real estate bubble grew, the United States relied on investments from nations with capital
reserves and Sovereign Wealth Funds (SWFs) to finance its growing debt.
c) Unlike other recent financial crises, investors did not pull out of the United States, and the dollar has not
d) The United States has continued to run huge deficits in the balance of payments and relied on countries like
China, Japan, Germany, and Saudi Arabia to offset its growing debt through purchases of property and
government Treasuries in the United States.
e) Some experts assert that because the United States continues to run large deficits in its balance of
payments and has high levels of national debt, the dollar is bound to be replaced by something else.
Some contend that a weak dollar is actually a sign of long-term U.S. economic strength as a prime
destination for investment.
f) Even before the crisis, many officials and experts felt confident that the euro would eventually
overtake the hegemonic role of the U.S. dollar in the global political economy, given the size of the
EU market and population.
a) Foreign exchange and monetary policies often play a role in trade disputes between the United States
and other countries. A small change in exchange rates can have large effects on levels of imports and
b) An example is exemplified by U.S. accusations that China has purposefully kept down the value of its
currency in order to increase its exports, at the expense of U.S. workers. See Box: The Tangled Web
of China’s Currency Manipulation.
c) Others have worried that government spending for the Troubled Asset Recovery Program (TARP),
three rounds of Quantitative Easing (QE1, 2, and 3), high levels of U.S. domestic spending, and the
costs of the wars in Afghanistan and Iraq will inevitably lead to excessive inflation, more debt, and a
weakening in the value of the U.S. dollar.
d) For now, rather than sharply cutting spending, the United States relies chiefly on external sources of
finance to cover its budget deficits, something neoliberals argue is risky and unsustainable.
e) Structuralists believe that excessive spending in terms of an “economic overextension” or
“overstretch” often accompanies imperial policies and gradually weakens an imperial power.
f) The realist Gabor Steingart of Germany’s Der Spiegel magazine argues that the United States is
considered safe because “one can almost completely rule out the possibility of political unrest in the
United States.”
g) Paul Krugman suggests the problem is overstated. Inflation from borrowing is low and the dollar
remains strong against any number of other currencies.
h) Other global factors that work in the favor of the United States include China’s slowing economy; the
destruction of the nuclear facilities in Fukushima, Japan after a tsunami in March 2011; and the
ongoing debt crisis in the Euro zone. The United States could very well be the new economic
Box: The Tangled Web of China’s Currency Manipulation
a) The United States and other nations have accused China of purposefully maintaining a low value for the
Yuan in order to stimulate Chinese exports, at the expense of other nations.
b) Between 1994 and 2010, the United States and other nations pressured Beijing to abandon the practice of
pegging the yuan to the USD.
c) A number political and economic interests come into play as China and other states consider how to solve
this issue.
d) Whether or not China is guilty of currency manipulation is not as important as the issue of who benefits
cui bono?from the currency situation. The United States and China have a highly interdependent
relationship, which means that this issue is likely to be resolved at high diplomatic levels.
If Not the Dollar, Then What?
a) In October of 2009, China, France, Japan, Russia, and some Persian Gulf countries discussed moving away
from the dollar and replacing it with a basket of currencies and gold.
b) Political economist Barry Eichengreen argues that the U.S. dollar is still the international reserve currency,
the Chinese yuan is not convertible by all countries.
c) A UN commission headed by Joseph Stiglitz recommended that SDRs play the role of a supranational
reserve currency to help eliminate the privilege of countries like the United States that borrow large
amounts of capital and whose domestic policies can impose adjustment problems on other states. But SDRs
are not accepted as foreign exchange.
d) States have not been willing to relinquish much of their authority to international monetary organizations,
creating weakness and ambiguity in the global regulation of the financial system.
e) Neither the European Union nor any other group of states wants the responsibility of managing the
financial system.
f) Although the yuan has been considered as a replacement for the dollar, China would have to open its
markets, change its growth strategy, and shift away from a pegged currencynone of which officials are in
a hurry to do.
a) When it comes to cooperation to solve some of these issues, states have preferred to act in their own
interest as opposed to giving more authority to IOs to solve any number of issues.
b) Management of the global monetary and finance structure by the IMF and World Bank remains weak.
c) The G8 and G20 have had more meetings but have failed to come to agreement on a variety of questions.
d) Increasingly, many developing nations such as Brazil, China, Russia, and India want a bigger say in these
institutions and processes.
a) By the mid-1990s, globalization and a wildcat version of capitalism were gradually undermining the global
monetary and finance structure, along with the United States’ leadership position. The United States
continues to borrow from (or be dependent on) surplus capital states to finance its deficit and high levels of
domestic consumption, which added to a real estate bubble and a near collapse of the global financial
system in 2008.
b) Once again, U.S. hegemonic responsibilities have become very expensive, both financially and politically.
The United States continues to look to other states to help finance its deficits, which, paradoxically, could
further undermine the stability of the global monetary and finance structure.
c) Despite the popularity of economic liberal ideas, states still feel compelled to intervene in foreign exchange
and finance markets to achieve their own national objectives.
d) The development of a global monetary and finance structure may appear to weaken the state, but in reality
the state retains a central role.
e) Domestic considerations still weigh more heavily than international interests.
f) Today’s global political economy is much more integrated than it was twenty-five years ago.
g) Interdependence and globalization have redistributed wealth and political power, making this has made it
exceptionally difficult to manage the finance and monetary structure in ways that reflect the interests of all
but the strongest, most developed states.
h) Emerging economies are demanding a bigger say in the rules and regulation all the time.
Key Terms:
foreign exchange rates
Currency exchange rates
hard currency
soft currency
hot money
gold standard
fixed exchange rates
Keynesian Compromise
reserve currency
balance of payments
sovereign wealth funds (SWFs)
flexible-exchange rate system
managed float
Mundell Trilemma
Troubled Asset Relief Program (TARP)
Quantitative Easing
Teaching Tips:
Many instructors find this the most difficult chapter or subject in IPE to teach and communicate to their
students, let alone for them to understand and appreciate. We suggest that instructors cover different parts of
this chapter over at least two, if not three class periods. Going back over concepts and ideas helps “peel the
onion” and improve understanding. Stress that many economists and political economists disagree about some
of the important issues associated with this structure such as the role of the state in setting interest rates or
whether or not a strong (or weak) currency is a good thing. (It all depends on Cui bono!)
Another tactic is to instruct students that understanding many of the elements to this part of the course should be
thought of as similar to learning a foreign language. Depending on their background, they (and even some
instructors) may not understand the chapter very well the first time through. They should be encouraged to go
through the basic elements of this structure again outside of class. An extra study session is often quite
worthwhile, especially when it comes close to exam time.
Another effective way to approach this chapter is to focus on historical developments surrounding the three
distinct monetary and finance systems and the important institutions and processes within each of them. One
theme or important question is to ask and then explain why these systems changedwhat factors brought about
the creation of one and then why it fell in decline? Use the three main IPE approaches to focus on different
elements of these systems and their contribution to system change.
Another approach, by those more familiar with the fundamental economic assumptions contained in each of
these systems, is to focus on those economic elements and then connect them to different political and social
ideas along with state and non-state (for example, IMF) interests and actions.
Still another approach is to work backwards. Start with a general discussion of different currency values and ask
students why the U.S. dollar seems to be weakening, and yet the U.S. economy and its currency continues to be
one of the world’s strongest (if not the strongest) currencies. Explore why other currencies have gained in
strength (especially the euro and Chinese yuan in particular) and some of the implications of this development.
From there go back and fill in with some history of different monetary and finance structures and what factors
account for growth in some economies along with how currency values and finance influence both the domestic
and international economies.
Against these broader themes spend some amount of time going through more of the specifics about the IMF,
which will be very helpful in understanding the financial crises of the 1990s and the current global economic
crisis in Chapter 8. Spend some time discussing the balance of payments as one factor that influences currency
We recommend that students learn about the current and capital accounts, but don’t try to get into too much
detail in this part of the course, as it tends to confuse students. The big point to make here is that when officials
and experts talk about the balance of payments they are usually referring to the current account, not the capital
account, unless explicitly dealing with that part of the equation.
The IMF and World Bank will discussed in the next chapter and again in Chapter 11. If students want to read
and study the IMF in more detail suggest some articles or books on the subject, or make it a paper topic, or an
issue to explore further in an economics, sociology, history, or politics course for example.
One of the major goals of this section of the book (and the course in general) should be to get students to
appreciate how dynamic the monetary and finance structure is. Spend some time on the argument that this
structure reflects a good deal of state efforts to reconcile their domestic interests and values with different
international goals and objectives that include maintaining an international and increasingly global system,
which is assumed by economic liberals to be in everyone’s interest. This theme is one that could easily connect
Chapters 6, 7, and 8. If students can make that sort of connection after reading those chapters, you will have
been quite successful in this phase of the course.
Finally, encourage students to learn the dynamics of this structure as well as possible as this knowledge will
help them understand a variety of IPE issues, including trade, debt, hunger, and environmental issues, along
with the national and international political-economic policies of many states. You might stress that if they want
to go on in a career in any of these fields or work abroad, some background knowledge in financial issues is a
must and will greatly benefit their careers.
Sample Essay-Discussion Questions:
1. Discuss the basic features of the international monetary and finance structure: who are the most important
actors, what are their interests, and what international political-economic institutions have been established to
achieve their goals?
2. A broad general overview question for an essay or research paper might be: (based on question number how
successful or unsuccessful have these actors and institutions been? (Note: this question is quite broad, but could
be broken down into time periods or asked more specifically in relation to developments in the monetary and
finance structure more recently.)
3. List and explain some of the more influential factors that influence or determine exchange rates. (Note: students
may not understand clearly the connection between interest rates and currency values, but this could be used as
the basis of clarifying that connection. Remember, economists often disagree with one another about the precise
nature of these connectionssomething important to stress.)
4. Outline some of the key features of the balance of payments and discuss its connection to exchange rates along
with the changing role of the IMF in the international political economy.
5. List and outline the key features of the three different international monetary and finance systems. What factors
influenced most the changes in the fundamental elements of these systems: political, economic, and/or social?
Which do you feel are most important and why? (Note: answers to this question might be grouped according to
the three major IPE analytical approaches. This could help students see that how they answer this last question
might be related to their own personal preference for a mercantilist, economic liberal, or structuralist outlook.)
6. Discuss and explain some of the reasons and factors that have led to the weakening in the value of U.S. dollar in
the early 2000s and after the global financial crisis that began in 2007. How do you reconcile or explain the fact
that while the U.S. dollar has weakened in relation to other currencies (especially the euro and the Chinese
yuan) the U.S. economy is still one of the strongest economies and places to invest in the world?
7. What factors explain the growing strength of the EU’s euro? Likewise, the Chinese yuan? To what extent is it
likely either of these currencies could replace the U.S. dollar as the world’s top currency? Why? Why not?
Explain. (Note: it may be useful to have students read Chapters 11, and 14 along with this chapter to answer
these questions.)
Sample Examination Questions:
1. Which of the following is not usually given as a reason states are sensitive to international currency and finance
issues? Currency and finance ……?
2. Which of the following hard and soft currencies is mismatched with its country of origin?
a) Hard: the Canadian dollar
3. Which of the following is usually not regarded as a benefit of currency devaluation?
4. Which of the following was not a characteristic of the fixed exchange rate system of the monetary and finance
a) The price of gold was fixed at $35 an ounce.
b) The formal and informal rules of this system reflected a political bargain between the United States and
5. Who complained that by holding (unofficially) weak U.S. dollars, his country was helping pay for the Vietnam
War, an adventure he and his country both opposed?
6. Since 1944, the role of the IMF in the monetary and finance structure has been to
a) help developing countries deal with a variety of monetary and financial crisis issues by promoting FDI in
these nations.
7. Which of the following was NOT a benefit of the flexible exchange rate system?
a) It helped entrench a multipolar security structure managed by Europe, China, Japan, the United States, and
the Soviet Union.
8. Which indicator is most important when it comes to determining the balance of payments and whether or not a
nation is going into debt?
a) the balance of trade
9. Which is NOT one of the three objectives of the Mundell Trilemma?
a) domestic economic independence
10. In the late 1990s the United States became dependent on countries with SWFs to invest their money in U.S.
businesses (which had the effect of helping the United States correct its balance of payments). Which countries
more recently have been regarded as SWF countries?
d) Germany, the United States, Canada, and the EU
11. U.S. officials have accused Chinese officials of “artificially devaluing the Chinese yuan (or renminbi) in order
to sustain China’s large number of exports to other countries. How did the Chinese do it?
a) by using large amounts of yuan to buy up U.S. dollars in their treasury, thereby flooding the market with
d) by taxing Chinese labor and postponing pay for government workers so as to accumulate yuan
12. What did the author of the statement in the last question specifically worry about?
13. In considering an alternative to the U.S. dollar, Joseph Stiglitz recommends
14. Which of the following are the BRICs?
a) Brazil, Russia, Italy, and Columbia
15. Which of the following is not an international finance organization that has been wrestling with the problem of
officially managing the international monetary and finance structure since the global financial crisis began in
d) the Basil Committee on Bank Supervision