EconomicPolicy(宏观经济学加州大学詹姆斯·布拉
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– they believed it was an important step in restoring prosperity
• After the Great Depression began, the gold standard broke apart
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Collapse of the Gold Standard
• Four factors made the gold standard a less secure monetary system
– everyone knew that governments could abandon their gold parities in an emergency
• The exchange rate moves up or down in response to the supply and demand for foreign exchange in order to make it so
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
• 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
• What were the causes of the three major currency crises of the 1990s?
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
The Gold Standard
– trade the $38.50 to the U.S. Treasury for 1.1 ounces of gold
– repeat the process as quickly as possible, making a 10% profit each time the circle is completed
Collapse of the Gold Standard
• The gold standard was suspended during World War I
• After the war ended, politicians and central bankers sought to restore it
• Countries gaining gold face no incentive to lower interest rates in order to stay on the gold standard
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Weaknesses of the Gold Standard
• If a country’s gold reserves are shrinking, it has a choice
– abandon the fixed exchange rate system
– make it more attractive for foreigners to invest by raising domestic interest rates
• puts contractionary pressure on the economy
– the post-war surplus economies did not lower interest rates as gold flowed in
Collapse of the Gold Standard
• Four factors made the gold standard a less secure monetary system
– after World War I, countries held their reserves in foreign currencies rather than gold
Weaknesses of the Gold Standard
• The gold standard tended to be deflationary
– under some circumstances, it pushed countries to raise their interest rates which reduced output and increased unemployment
• 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?
Weaknesses of the Gold Standard
• Under a gold standard, foreigncurrency earnings can also be used to purchase gold from the foreign country’s Treasury
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Figure 15.1 - How to Profit in the ForeignExchange Market
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
The Gold Standard
• Someone with an ounce of gold could
– trade it to the British Treasury for £15.58333
– trade those pounds for dollars in the foreign exchange market and get $38.50
• the exchange rate of the dollar for the pound was £1.00=$2.40
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
The Gold Standard
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Questions
• Why do most countries today have floating exchange rates?
• Why has western Europe recently created a “monetary union”--an irrevocable commitment to fixed exchange rates within western Europe?
EconomicPolicy(宏观经济 学加州大学詹姆斯·布拉
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Questions
• How has the world organized its international monetary system?
– the pound trades for $2.64 (10% higher than the ratio of the gold parities $2.40)
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Weaknesses of the Gold Standard
• If the exchange rate is floating, foreigners’ domestic currency earnings must be used to buy exports or to invest in the home country
• If a country’s net exports plus net foreign investment are less than zero, its Treasury will find itself losing gold
– the country’s gold reserves shrink
• Example of currency arbitrage
– the U.S. government is willing to buy gold at $35 per ounce
– the British government is willing to buy gold at £15.58333 per o of the Gold Standard
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
The Gold Standard
• When two countries were on the gold standard, their nominal exchange rate was fixed at the ratio of their gold parities
– everyone knew that governments were trying to keep interest rates low enough to produce full employment
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
– it never provided a countervailing push to other countries to lower their interest rates
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
– 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-Hill Companies, Inc. All rights reserv
– at World War II parities
• the U.S. dollar was equal to 1/35 of an ounce of gold
• the British pound sterling was set to equal 1/15.58333 ounces of gold
• After the Great Depression began, the gold standard broke apart
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Collapse of the Gold Standard
• Four factors made the gold standard a less secure monetary system
– everyone knew that governments could abandon their gold parities in an emergency
• The exchange rate moves up or down in response to the supply and demand for foreign exchange in order to make it so
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
• 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
• What were the causes of the three major currency crises of the 1990s?
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
The Gold Standard
– trade the $38.50 to the U.S. Treasury for 1.1 ounces of gold
– repeat the process as quickly as possible, making a 10% profit each time the circle is completed
Collapse of the Gold Standard
• The gold standard was suspended during World War I
• After the war ended, politicians and central bankers sought to restore it
• Countries gaining gold face no incentive to lower interest rates in order to stay on the gold standard
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Weaknesses of the Gold Standard
• If a country’s gold reserves are shrinking, it has a choice
– abandon the fixed exchange rate system
– make it more attractive for foreigners to invest by raising domestic interest rates
• puts contractionary pressure on the economy
– the post-war surplus economies did not lower interest rates as gold flowed in
Collapse of the Gold Standard
• Four factors made the gold standard a less secure monetary system
– after World War I, countries held their reserves in foreign currencies rather than gold
Weaknesses of the Gold Standard
• The gold standard tended to be deflationary
– under some circumstances, it pushed countries to raise their interest rates which reduced output and increased unemployment
• 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?
Weaknesses of the Gold Standard
• Under a gold standard, foreigncurrency earnings can also be used to purchase gold from the foreign country’s Treasury
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Figure 15.1 - How to Profit in the ForeignExchange Market
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
The Gold Standard
• Someone with an ounce of gold could
– trade it to the British Treasury for £15.58333
– trade those pounds for dollars in the foreign exchange market and get $38.50
• the exchange rate of the dollar for the pound was £1.00=$2.40
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
The Gold Standard
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Questions
• Why do most countries today have floating exchange rates?
• Why has western Europe recently created a “monetary union”--an irrevocable commitment to fixed exchange rates within western Europe?
EconomicPolicy(宏观经济 学加州大学詹姆斯·布拉
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Questions
• How has the world organized its international monetary system?
– the pound trades for $2.64 (10% higher than the ratio of the gold parities $2.40)
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
Weaknesses of the Gold Standard
• If the exchange rate is floating, foreigners’ domestic currency earnings must be used to buy exports or to invest in the home country
• If a country’s net exports plus net foreign investment are less than zero, its Treasury will find itself losing gold
– the country’s gold reserves shrink
• Example of currency arbitrage
– the U.S. government is willing to buy gold at $35 per ounce
– the British government is willing to buy gold at £15.58333 per o of the Gold Standard
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
The Gold Standard
• When two countries were on the gold standard, their nominal exchange rate was fixed at the ratio of their gold parities
– everyone knew that governments were trying to keep interest rates low enough to produce full employment
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
– it never provided a countervailing push to other countries to lower their interest rates
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserv
– 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-Hill Companies, Inc. All rights reserv
– at World War II parities
• the U.S. dollar was equal to 1/35 of an ounce of gold
• the British pound sterling was set to equal 1/15.58333 ounces of gold