5. Bretton Woods Aa Aa Suppose that after World War II, the United States and Gr

Question

5. Bretton Woods Aa Aa Suppose that after World War II, the United States and Great Britain agree to peg their currencies to each other under the Bretton Woods system at an exchange rate of $2 per pound. Suppose American demand for pounds increases, and the equilibrium dollar price of a pound rises to $3 per pound. Which of the following actions could the U.S. government use under Bretton Woods to help eliminate the balance-of-payments imbalance at the pegged exchange rate? O Exchange dollars for pounds in order to buy gold from Great Britain. O Decrease U.S. income taxes. Borrow British pounds from the IMF and use the pounds to buy dollars. Which of the following is the reason the Bretton Woods system was officially dissolved in 1971? O Temporary economic changes in some of the member countries deviated equilibrium exchange rates from targeted rates. O The International Monetary Fund (IMF) refused to continue supervising the exchange-rate practices of member countries O The U.S. suffered growing balance-of-payments deficits In a fixed exchange rate regime, the value of a currency is pegged to: A currency board O An interest rate standard such as the Treasury bill rate in the U.S. O An anchor currency With either dollarization or currency boards, interest rates must be equal to the reserve currency country's prevailing rates. True False

Explanation / Answer

1) Which of the following actions could the US Government use under Bretton Woods to help eliminate balance of payments imbalance at the pegged exchange rate?

Exchange dollars for pounds in order to buy gold from Great Britain

Explanation : As in this system the exchange rate can be pegged against the gold too, so here dollars can be exhanged for pounds as dollar is overvalued, so that it can buy gold.

2) Which of the following is the reason the Bretton Woods system was officially dissolved in 1971?

The U.S. suffered growing balance of payments deficits

Explanation : Under Bretton woods system the external values of foreign currencies were fixed as per the US Dollar and these value was expressed in gold at $35 per ounce. Then there was a surplus of US Dollars and they did not have enough gold to cover the volume of dollars in circulation and it was overvalued therefore there was deficit of balance of payments.

3) In a fixed exchange rate regime, the value of a currency is pegged to :

an anchor currency

Explanation : Fixed exchange rate is also known as the pegged exchange rate where the currency's vlaue of one country is fixed against the other currency of another country or even gold. Now, that pegged currency is US Dollar as most of the international trade happens as per dollar as it is the widely accepted currency. That is called as the anchor currency.

4) With either dollariation or currency boards, interest rates must be equal to the reserve currency country's prevailing rates

True

Explanation : In dollarization the unequal interest rates will cause the investments to flow in or out of the country and with currency boards it should be equal otherwise arbitrage will equalise the interest rate. Thus, interest ratea much be equal to the reserve currency country's prevailing rates either with dollarization or currency boards.

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