international finance - international monetary system 21-28
DESCRIPTION
International Monetary System remainingTRANSCRIPT
Fre
e F
loa
tin
g
•V
alu
e o
f th
e c
urr
en
cy i
s d
ete
rmin
ed
by
ma
rke
t d
em
an
d f
or
an
d s
up
ply
of
the
cu
rre
ncy
. Tr
ad
e f
low
s a
nd
ca
pit
al
flo
ws
are
th
e m
ain
fa
cto
rs a
ffe
ctin
g t
he
exc
ha
ng
e r
ate
.
•T
he
re i
s n
o p
re-d
ete
rmin
ed
off
icia
l ta
rge
t fo
r th
e e
xch
an
ge
ra
te a
nd
th
e m
on
eta
ry a
uth
ori
tie
s ca
n s
et
inte
rest
ra
tes
as
targ
et
vari
ab
le f
or
mo
ne
tary
po
licy
ob
ject
ive
.
•In
th
e l
on
g-r
un
ma
cro
eco
no
mic
fa
cto
rs,
like
pe
rfo
rma
nce
of
the
eco
no
my,
te
chn
olo
gic
al
de
velo
pm
en
t, p
rod
uct
ivit
y a
nd
co
mp
eti
tive
ne
ss e
tc.
dri
ves
the
va
lue
of
the
cu
rre
ncy
.
•It
is
rare
fo
r p
ure
fre
e f
loa
tin
g e
xch
an
ge
ra
tes
to e
xist
-m
ost
g
ove
rnm
en
ts a
t o
ne
tim
e o
r a
no
the
r se
ek
to
"m
an
ag
e"
the
va
lue
of
the
ir c
urr
en
cy t
hro
ug
h c
ha
ng
es
in i
nte
rest
ra
tes
an
d o
the
r co
ntr
ols
.
Ma
na
ge
d F
loa
tin
g
•U
nd
er
the
ma
na
ge
d f
loa
tin
g r
eg
ime
, th
ou
gh
exc
ha
ng
e r
ate
is
de
term
ine
d b
y m
ark
et
forc
es
of
de
ma
nd
an
d s
up
ply
, th
e
cen
tra
l b
an
ks o
r th
e g
ove
rnm
en
ts s
et
som
e k
ind
ta
rge
t e
xch
an
ge
ra
te t
o p
rote
ct t
he
ir e
xpo
rts/
imp
ort
. T
he
ce
ntr
al
ba
nks
th
us
reg
ula
rly
in
terv
en
e i
n t
he
fo
reig
n e
xch
an
ge
m
ark
et
to p
reve
nt
an
y k
ind
of
exc
ess
ive
vo
lati
lity
or
div
erg
en
ce f
rom
th
e t
arg
et
rate
.
•C
urr
en
cy c
an
mo
ve b
etw
ee
n p
erm
itte
d b
an
ds
of
flu
ctu
ati
on
. E
xch
an
ge
ra
te i
s d
om
ina
nt
targ
et
of
eco
no
mic
p
oli
cy-m
ak
ing
•In
tere
st r
ate
, m
on
ey
su
pp
ly a
nd
th
e F
II/F
DI
po
licy
are
als
o
set
to m
ee
t th
e t
arg
et
exc
ha
ng
e r
ate
.
Ad
van
tag
es
of
flo
ati
ng
exc
ha
ng
e r
ate
s
•F
luct
ua
tio
ns
in t
he
exc
ha
ng
e r
ate
ca
n p
rov
ide
an
au
tom
ati
c a
dju
stm
en
t fo
r co
un
trie
s w
ith
a l
arg
e b
ala
nce
of
pa
ym
en
ts d
efi
cit.
If
an
eco
no
my
ha
s a
la
rge
de
fici
t, t
he
re i
s a
ne
t o
utf
low
of
curr
en
cy
fro
m t
he
co
un
try.
Th
is p
uts
do
wn
wa
rd p
ress
ure
on
th
e e
xch
an
ge
ra
te a
nd
if
a d
ep
reci
ati
on
occ
urs
, th
e r
ela
tive
pri
ce o
f e
xpo
rts
in
ove
rse
as
ma
rke
ts f
all
s w
hil
e t
he
re
lati
ve p
rice
of
imp
ort
s in
th
e
ho
me
ma
rke
ts g
oe
s u
p.
Th
is l
ea
ds
to r
ed
uce
th
e o
vera
ll d
efi
cit
in
the
ba
lan
ce o
f tr
ad
e p
rov
ide
d t
ha
t th
e p
rice
ela
stic
ity
of
de
ma
nd
fo
r e
xpo
rts
an
d t
he
pri
ce e
last
icit
y o
f d
em
an
d f
or
imp
ort
s is
su
ffic
ien
tly
h
igh
.
•F
loa
tin
g e
xch
an
ge
ra
tes
giv
es
the
go
vern
me
nt
/ m
on
eta
ry
au
tho
riti
es’
fle
xib
ilit
y i
n d
ete
rmin
ing
in
tere
st r
ate
s. T
his
is
be
cau
se
inte
rest
ra
tes
do
no
t h
ave
to
be
se
t to
ke
ep
th
e v
alu
e o
f th
e
exc
ha
ng
e r
ate
wit
hin
pre
-de
term
ine
d b
an
ds.
Co
ntd
.
•B
ala
nce
of
Pa
ym
en
ts o
n c
urr
en
t a
cco
un
t d
ise
qu
ilib
riu
m c
an
a
uto
ma
tica
lly
be
re
sto
red
to
eq
uil
ibri
um
flo
ati
ng
exc
ha
ng
e
rate
re
gim
e a
nd
th
e s
carc
ity
or
surp
lus
of
an
y c
urr
en
cy i
s e
lim
ina
ted
un
de
r fl
oa
tin
g e
xch
an
ge
ra
te r
eg
ime
. B
ala
nce
of
pa
ym
en
t a
dju
stm
en
t is
sm
oo
the
r a
nd
pa
inle
ss u
nd
er
flo
ati
ng
exc
ha
ng
e r
ate
re
gim
e c
om
pa
red
to
fix
ed
exc
ha
ng
e
rate
sys
tem
.
•A
uto
no
my
of
mo
ne
tary
au
tho
riti
es
pre
serv
e u
nd
er
flo
ati
ng
e
xch
an
ge
ra
te s
yste
m a
s th
ere
is
no
ta
rge
t e
xch
an
ge
ra
te t
o
ma
inta
in.
Th
e f
un
da
me
nta
l a
rgu
me
nt
in f
avo
ur
flo
ati
ng
e
xch
an
ge
ra
te s
yste
m i
s th
at
it a
llo
ws
cou
ntr
ies
au
ton
om
y
wit
h r
esp
ect
to
th
eir
use
of
mo
ne
tary
, fi
sca
l a
nd
oth
er
po
licy
in
stru
me
nts
an
d a
t th
e s
am
e t
ime
ext
ern
al
eq
uil
ibri
um
is
en
sure
d b
eca
use
of
fle
xib
le e
xch
an
ge
ra
te.
Arg
um
en
t a
ga
inst
flo
ati
ng
exc
ha
ng
e
rate
s•
Ma
rke
t fo
rce
s m
ay
fa
il t
o d
ete
rmin
e t
he
ap
pro
pri
ate
exc
ha
ng
e r
ate
an
d
he
nce
flo
ati
ng
exc
ha
ng
e r
ate
re
gim
e m
ay
no
t p
rovid
e t
he
de
sire
d r
esu
lts
an
d m
ay
als
o l
ea
d t
o m
isa
llo
cati
on
of
reso
urc
es.
•It
is
imp
oss
ible
to
ha
ve a
n e
xch
an
ge
ra
te s
yste
m w
ith
ou
t o
ffic
ial
inte
rve
nti
on
. G
ove
rnm
en
t m
ay
no
t in
terv
en
e,
ho
we
ver
do
me
stic
m
on
eta
ry p
oli
cy a
nd
fis
cal
po
licy
wo
uld
de
fin
ite
ly i
nfl
ue
nce
th
e e
xch
an
ge
ra
te.
•A
wil
dly
flu
ctu
ati
ng
exc
ha
ng
e r
ate
at
the
me
rcy
of
na
tio
na
l a
nd
in
tern
ati
on
al
curr
en
cy s
pe
cula
tors
. V
ola
tile
exc
ha
ng
e r
ate
in
tro
du
ces
con
sid
era
ble
un
cert
ain
ty i
n e
xpo
rt a
nd
im
po
rt p
rice
s a
nd
co
nse
qu
en
tly
to
e
con
om
ic d
eve
lop
me
nt.
At
the
sa
me
tim
e,
ab
oli
tio
n o
f e
xch
an
ge
co
ntr
ols
ca
use
s ca
pit
al
flig
ht.
•A
de
pre
cia
tin
g c
urr
en
cy w
ill
he
lp a
co
un
try
's e
xpo
rtin
g s
ect
or.
Ho
we
ver,
th
e c
ost
of
imp
ort
s w
ill
inva
ria
bly
ris
e l
ea
din
g t
o c
ost
pu
sh in
fla
tio
na
ry
pre
ssu
res.
Th
ose
pe
op
le w
ho
se liv
eli
ho
od
s re
ly o
n t
he
co
nsu
mp
tio
n o
f g
oo
ds
wit
h h
igh
imp
ort
co
nte
nt
wil
l e
xpe
rie
nce
ha
rdsh
ip.
Cu
rre
ncy
Bo
ard
Sys
tem
•U
nd
er
a C
urr
en
cy B
oa
rd r
eg
ime
th
e d
om
est
ic c
urr
en
cy is
ba
cke
d (
ge
ne
rall
y
mo
re t
ha
n 5
0%
) w
ith
fo
reig
n c
urr
en
cy r
ese
rve
s a
nd
th
e B
oa
rd is
ma
nd
ate
d
to c
on
vert
do
me
stic
cu
rre
ncy
into
fo
reig
n c
urr
en
cy o
n d
em
an
d a
t a
fix
ed
p
rice
.
•A
cu
rre
ncy
bo
ard
ma
inta
ins
ab
solu
te,
un
lim
ite
d c
on
vert
ibil
ity
be
twe
en
its
n
ote
s a
nd
co
ins
an
d t
he
cu
rre
ncy
ag
ain
st w
hic
h t
he
y a
re p
eg
ge
d,
at
a f
ixe
d
rate
of
exc
ha
ng
e,
wit
h n
o r
est
rict
ion
s o
n c
urr
en
t-a
cco
un
t o
r ca
pit
al
acc
ou
nt
tra
nsa
ctio
ns.
•C
urr
en
cy B
oa
rd r
eg
ime
is
ge
ne
rall
y c
on
sid
ere
d a
s G
old
Sta
nd
ard
wit
ho
ut
Go
ld.
•U
nd
er
curr
en
cy b
oa
rd G
ove
rnm
en
ts c
an
no
t p
rin
t m
on
ey
wit
ho
ut
ba
ckin
g
fore
ign
cu
rre
ncy
ass
ets
an
d h
en
ce it
can
on
ly t
ax
or
bo
rro
w t
o m
ee
t th
eir
sp
en
din
g c
om
mit
me
nts
.
•U
nd
er
curr
en
cy b
oa
rd G
ove
rnm
en
ts c
an
no
t p
rin
t m
on
ey
wit
ho
ut
ba
ckin
g
fore
ign
cu
rre
ncy
ass
ets
an
d h
en
ce it
can
on
ly t
ax
or
bo
rro
w t
o m
ee
t th
eir
sp
en
din
g c
om
mit
me
nts
. (i
nte
rest
ca
n n
ot
be
ch
an
ge
d b
y g
ove
rnm
en
ts)
Ad
van
tag
es
an
d D
isa
dva
nta
ge
s
•C
urr
en
cy B
oa
rds
are
sa
id t
o s
ub
stit
ute
a d
isci
pli
ne
d m
on
eta
ry p
oli
cy r
ule
fo
r u
nd
isci
pli
ne
d d
iscr
eti
on
ary
mo
ne
tary
po
licy
, th
ere
by
eli
min
ati
ng
th
e
infl
ati
on
bia
s o
f th
e l
ate
r.
•T
he
vir
tue
of
this
sys
tem
is
tha
t q
ue
stio
ns
of
curr
en
cy s
tab
ilit
y n
o lo
ng
er
ap
ply
.
•T
he
dra
wb
ack
s a
re t
ha
t th
e c
ou
ntr
y n
o lo
ng
er
ha
s th
e a
bil
ity
to
se
t m
on
eta
ry p
oli
cy a
cco
rdin
g t
o o
the
r d
om
est
ic c
on
sid
era
tio
ns,
an
d t
ha
t th
e
fixe
d e
xch
an
ge
ra
te w
ill,
to
a l
arg
e e
xte
nt,
als
o f
ix a
co
un
try
's t
erm
s o
f tr
ad
e,
irre
spe
ctiv
e o
f e
con
om
ic d
iffe
ren
ces
be
twe
en
it
an
d its
tra
din
g
pa
rtn
ers
.
Ho
ng
Ko
ng
, B
ulg
ari
a,
Lith
ua
nia
, E
sto
nia
an
d m
an
y s
ma
ll e
con
om
ies
ha
ve b
ee
n
pra
ctic
ing
cu
rre
ncy
bo
ard
sys
tem
. A
rge
nti
na
ab
an
do
ne
d it
s cu
rre
ncy
bo
ard
in
Jan
ua
ry 2
00
2 a
fte
r a
se
vere
re
cess
ion
. Ty
pic
all
y, c
urr
en
cy b
oa
rds
ha
ve
ad
van
tag
es
for
sma
ll o
pe
n e
con
om
ies
wh
ich
wo
uld
fin
d in
de
pe
nd
en
t m
on
eta
ry p
oli
cy d
iffi
cult
to
su
sta
in.
Th
ey
ca
n a
lso
fo
rm a
cre
dib
le
com
mit
me
nt
to lo
w i
nfl
ati
on
.
Cu
rre
ncy
Ba
ske
t Sys
tem
•
A c
urr
en
cy b
ask
et
con
tain
s n
um
be
r o
f cu
rre
nci
es
wit
h d
iffe
ren
t w
eig
ht.
Fo
r
exa
mp
le,
on
e m
ay
co
nst
ruct
a c
urr
en
cy b
ask
et
wit
h 2
5%
Ero
s, 4
0%
U.S
. d
oll
ars
,
an
d 3
5%
Bri
tish
po
un
ds.
Th
e w
eig
ht
an
d t
he
va
lue
of
the
dif
fere
nt
curr
en
cie
s
de
term
ine
th
e C
urr
en
cy B
ask
et
valu
e.
•C
urr
en
cy b
ask
et
pro
vid
es
an
id
ea
l m
eth
od
to
pe
g a
cu
rre
ncy
wit
ho
ut
ove
rexp
osi
ng
it
to t
he
flu
ctu
ati
on
s o
f a
sin
gle
cu
rre
ncy
.
•C
urr
en
cy B
ask
et
is g
en
era
lly
use
d m
eth
od
fo
r st
ab
iliz
ing
th
e v
alu
e o
f a
na
tio
na
l
curr
en
cy a
ga
inst
mu
ltip
le f
ree
ly-t
rad
ed
oth
er
curr
en
cie
s.
•S
om
e c
ou
ntr
ies
ha
ve v
ery
lit
tle
in
tere
st i
n f
loa
tin
g t
he
ir n
ati
on
al
curr
en
cie
s o
n
the
op
en
ma
rke
t, o
fte
n b
eca
use
of
hig
h i
nfl
ati
on
in
th
eir
pa
st.
•O
ne
me
tho
d o
f co
ntr
oll
ing
th
is is
to t
ie t
he
va
lue
of
you
r n
ati
on
al
curr
en
cy t
o
an
oth
er
cou
ntr
y's
str
on
g c
urr
en
cy,
as
wa
s se
en
re
cen
tly
in
Arg
en
tin
a w
ith
th
e
pe
so's
va
lue
tie
d t
o t
he
U.S
. d
oll
ar.
•H
ow
eve
r, t
his
ca
n c
au
se p
rob
lem
s .
Arg
en
tin
ian
exp
ort
s b
eca
me
un
com
pe
titi
ve b
eca
use
th
ey
ha
d t
o b
e p
aid
fo
r in
US
D a
s th
e d
oll
ar
kep
t ri
sin
g
aga
inst
oth
er
wo
rld
cu
rre
nci
es
like
th
e e
uro
, ye
n,
an
d p
ou
nd
ste
rlin
g.