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Chapter 2
The International Monetary System
◼ Learning Objectives
1. Explore how the international monetary system has evolved from the days of the gold
standard to today’s eclectic currency arrangement
2. Examine how the choice of fixed versus flexible exchange rate regimes is made by a
country in the context of its desires for economic and social independence and openness
3. Describe the tradeoff a nation must make between a fixed exchange rate, monetary
independence, and freedom of capital movements—the impossible trinity
4. Explain the dramatic choices the creation of a single currency for Europe—the euro—
required of the European Union’s member states
5. Study the complexity of exchange rate regime choices faced by many emerging market
countries today including China
◼ Chapter Outline
I. History of the International Monetary System
A. The Gold Standard, 1876–1913
B. The Interwar Years and World War II, 1914–1944
C. Bretton Woods and the International Monetary Fund, 1944
D. Fixed Exchange Rates, 1945–1973
E. The Floating Exchange Rates, 1973–1997
F. The Emerging Era, 1997–Present
G. IMF Classification of the Currency Regimes
H. Brief Classification History
I. The IMF’s 2009 de facto System
Category 1: Hard Pegs
Category 2: Soft Pegs
Category 3: Floating Arrangements
Category 4: Residual
J. A Global Eclectic
© 2018 Pearson Education, Inc.
2. Defending a Fixed Exchange Rate. What did it mean under the gold standard to “defend a
fixed exchange rate,” and what did this imply about a country’s money supply?
3. Bretton Woods. What was the foundation of the Bretton Woods international monetary
system, and why did it eventually fail?
4. Technical Float. Speaking very specifically—technically, what does a floating rate of
exchange mean? What is the role of government?
5. Fixed versus Flexible. What are the advantages and disadvantages of fixed exchange
rates?
© 2018 Pearson Education, Inc.
6. De facto and de jure. What do the terms de facto and de jure mean in reference to the
International Monetary Fund’s use of the terms?
7. Crawling Peg. How does a crawling peg fundamentally differ from a pegged exchange
rate?
8. Global Eclectic. What does it mean to say the international monetary system today is a
global eclectic?
9. The Impossible Trinity. Explain what is meant by the term Impossible Trinity, and why it
is in fact “impossible.”
© 2018 Pearson Education, Inc.
14. The Ideal Currency. What are the attributes of the ideal currency?
15. Exchange rate stability. The value of the currency would be fixed in relationship to other
17. Monetary independence. Domestic monetary and interest rate policies would be set by
each individual country to pursue desired national economic policies, especially as they
might relate to limiting inflation, combating recessions, and fostering prosperity and full
employment.
18. Emerging Market Regimes. High capital mobility is forcing emerging market nations to
choose between free-floating regimes and currency board or dollarization regimes. What
are the main outcomes of each of these regimes from the perspective of emerging market
nations?
© 2018 Pearson Education, Inc.
19. Globalizing the Yuan. What are the major changes and developments that must occur for
the Chinese yuan to be considered “globalized?”
20. Triffin Dilemma. What is the Triffin Dilemma? How does it apply to the development of
the Chinese yuan as a true global currency?
21. China and the Impossible Trinity. What choices do you believe that China will make in
terms of the Impossible Trinity as it continues to develop global trading and use of the
Chinese yuan?
