Copyright ? 2002 by The McGraw-panies, Inc. All rights reserved. 15- 1 CHAPTER 15 International Economic Policy Copyright ? 2002 by The McGraw-panies, Inc. All rights reserved. 15- 2 Questions ? How has the anized its international ary system? ? What is a fixed exchange rate system? ? What is a floating exchange rate system? ? What are the costs and benefits of fixed exchange rates vis -à- vis floating exchange rates? Copyright ? 2002 by The McGraw-panies, Inc. All rights reserved. 15- 3 Questions ? Why do most countries today have floating exchange rates? ? Why has western Europe recently created a “ ary union ”--an mitment to fixed exchange rates within western Europe? ? What were the causes of the three major currency crises of the 1990s? Copyright ? 2002 by The McGraw-panies, Inc. All rights reserved. 15- 4 The Gold Standard ? Before World War I, nearly all of the world economy was on the gold standard – a government would define a unit of its currency as worth a particular amount of gold – the currency was convertible ? could be converted into gold freely – the currency ’ s price in terms of gold was its parity Copyright ? 2002 by The McGraw-panies, Inc. All rights reserved. 15- 5 Figure - Growth of the Gold Standard Copyright ? 2002 by The McGraw-panies, Inc. All rights reserved. 15- 6 The Gold Standard ? When two countries were on the gold standard, their nominal exchange rate was fixed at the ratio of their gold parities – at World War II parities ? the . dollar was equal to 1/35 of an ounce of gold ? the British pound sterling was set to equal 1/ ounces of gold ? the exchange rate of the dollar for the pound was ￡ =$ Copyright ? 2002 by The McGraw-panies, Inc. All rights reserved. 15- 7 The Gold Standard ? Example of currency arbitrage – the . government is willing to buy gold at $35 per ounce – the British government is willing to buy gold at ￡ per ounce – the pound tr
