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Glenn Hubbard, Tony O'Brien

Chapter 19

The International Financial System


Problem 1

What is an exchange rate system? What is the difference between a fixed exchange rate system and a managed float exchange rate system?

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Problem 2

How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard?

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Problem 3

Briefly explain whether you agree with the following statement: The Federal Reserve is limited in its ability to issue paper currency by the amount of gold the federal government has in Fort Knox. To issue more paper currency, the government first has to buy more gold."

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Problem 4

An article in the Atlantic referred to a poll of economists that found no support for the United States to readopt the gold standard:
It prevents the central bank from fighting recessions by outsourcing monetary policy decisions to how much gold we have- which, in turn, depends on our trade balance and on how much of the shiny rock we can dig up. When we peg the dollar to gold we have to raise interest rates when gold is scarce, regardless of the state of the economy.
Why does the writer state that a gold standard would prevent "the central bank from fighting recessions?

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Problem 5

The United States and most other countries abandoned the gold standard during the 1930 s. Why would the 1930 s have been a particularly difficult time for countries to have remained on the gold standard? (Hint: Think about the macroeconomic events of the 1930 s and about the possible problems with carrying out an expansionary monetary policy while remaining on the gold standard.)

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Problem 6

After World War II, why might countries have preferred the Bretton Woods system to reestablishing the gold standard? In your answer, be sure to note the important ways in which the Bretton Woods system differed from the gold standard.

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