INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 21
1. In 1870, as a consequence of their defeat in the Franco-Prussian war, the French
were directed to pay 1 million francs-or in gold to the Prussians. Use your
2. Spain and bullionism. In the sixteenth and seventeenth centuries, as a result of
colonizing South America, Spain acquired huge amounts of gold. However, it seemed
that the more gold there was flowing from the Americas into Spain, the more gold
there was flowing out of Spain to other European countries. Explain.
3. According to Gresham’s law, bad money always displaces good money. What is the
implication of this law for a bimetallic – silver/gold – standard?
4. We are in 1890: Great Britain and France are both on the gold standard. British
exports to France exceed their imports from France. What will happen to the exchange
rate between the pound and the franc? Describe the adjustment mechanism.
5. When Great Britain decided to go back on the gold standard in 1925, the Chancellor of
the Exchequer chose the pre-1914 gold parity for the pound. Use the purchasing
power parity concept introduced in the previous chapter to explain how he could have
derived a more realistic parity.
6. In the thirties, countries tried to fend off the Depression and stimulate their economy
with beggar thy neighbor methods. Explain the mechanism of a competitive
devaluation (cf. Chapter 19). Since a devaluation produces a balance-of-trade
improvement only at the expense of the trade partners, what action will the trade
partners take? What is the resulting impact on the volume of trade?
7. What is the main difference between a gold standard and a gold-exchange standard?
8. Towards the end of the Bretton Woods era, the German currency (DM) was
undervalued with respect to the dollar. What was the impact on the U.S./German
balance of trade? What steps did Germany take, with the approval of the IMF, to solve
the problem?
9. Exchange rate fluctuations since 1973 appear to be larger than warranted by the
underlying economic circumstances in the nations involved. What reasons have been
offered to explain this experience?
11. How did the role of the IMF evolve after the demise of Bretton Woods?
13. Explain to your president why the gold standard will bring her fame in good times and
disrepute in recessions.
15. You are an economist advising an Asian country on its exchange rate regime choice.
In a conference, its leaders tell you that domestic stability (full employment) is their first
priority and that they have very large foreign currency reserves. What exchange rate
regime do you recommend? Given your recommendation, what problems do you warn
them they may encounter? When they ask how they can minimize these problems,
what do you say?
INTERNATIONAL ECONOMICS, 7TH EDITION
Study Resources: Questions for Study & Review
Chapter 21: Answers
1.
As gold flowed from France to Germany, the French money supply would have
decreased and the opposite happened in Germany. The reduction in the French money
3. Since gold is scarcer than silver, citizens would consider gold as a more desirable
5.
This decision had dire consequences on the British economy. Since the impact of the
First World War was more devastating in Great Britain than in the US, the pound lost a
7. The value of one unit of currency is defined in terms of gold and the quantity of the
currency in circulation is also specified in terms of gold reserves with the gold standard.
9.
In Chapter 20, Dornbusch overshooting hypothesis shows that short-run price stickiness
11. After the demise of the Bretton Woods system, the IMF role evolved into that of an
13. In principle, with the gold standard, the economy is always at full employment as
15. A flexible exchange rate regime isolates countries from foreign fluctuations. Some
of the slack is taken by an exchange rate adjustment and monetary policy works