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Government Policies Toward the Foreign Exchange Market

Explore government policies towards the foreign exchange market, various exchange rate management systems, the role of the International Monetary Fund (IMF), and the evolution of international monetary systems from the Gold Standard to the Bretton Woods System. Learn about the Quota System that determines IMF financing and member privileges.

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Government Policies Toward the Foreign Exchange Market

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  1. Government Policies Toward the Foreign Exchange Market Exchange Rate Management Systems International Monetary Systems International Monetary Fund (IMF)

  2. Exchange Rate Management Systems • Flexible (Floating) Exchange Rate System • Fixed Exchange Rate System • Managed (Dirty) Float Exchange Rate System • Exchange Controls

  3. International Monetary Systems • The Gold Standard (The Price-Specie-Flow Mechanism), 1870-1914 • The Interwar Years, 1918-1939 • The Bretton Woods System, 1944-1971 • The Current System: Limited Anarchy

  4. The Bretton Woods System • Create a set of rules that would maintain fixed exchange rates in the face of short-term fluctuations; • Guarantee that changes in exchange rates would occur only in the face of long-term, persistent deficits or surpluses in the balance of payments; • Ensure that when such changes did occur, they would not spark a series of competitive devaluations.

  5. The International Monetary Fund The IMF was intended to play two major roles in the Bretton Woods System: • the Fund should discourage aggressive exchange rate behavior by members and help them manage their balance of payments efficiently; • the Fund was given resources to lend international reserves to countries with balance of payments difficulties.

  6. The Quota System The IMF is financed by its members. Upon joining the IMF, a nation has to subscribe to a Quota, which is based on its relative economic significance and the level of its international business activities. The size of the member’s quota determines the country’s voting power and borrowing rights.

  7. The Quota System • Voting Power • 250 “basic votes” plus one vote for each SDR100,000 of quota. • Borrowing Rights • Unconditional Borrowing Rights • Conditional Borrowing Rights

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