Muhammad Havin Maulana Akbar

L201329190406

Question 1
HISTORY/ STAGES ON INTERNATIONAL MONETARY SYSTEM
The internationary monetary system that exist today has evolved over a period of more than 150
years. In the evolution process, several monetary system came into existance that either
collapsed due to their weakness or were modified to cope with the changing international
economic order. These stages consist of the following
1.THE GOLD STANDARD (1816- 1914)
The gold standard involved Buying and selling of paper currency in exchange for gold on
the request of any individual of firm. In this system Gold is freely transferable between
countries. Participants in this system included UK, France, Germany & USA
This is the first modern international monetary system, in this system each currency was linked
to a weight of gold.
Under gold standard, each country had to establish the rate at which its currency could be
converted to a weight of gold.
This system created a fixed exchange rate system because each country defined the value of its
currency in terms of gold. Suppose the US announces a willingness to buy gold for $200/oz and
Great Britain announces a willingness to buy gold for 100. Then 1=$2
ADVANTAGES OF THE GOLD STANDARD SYSTEM
1. Highly stable exchange rates under the classical gold standard provided an environment that
was conducive to international trade and investment.
2. Misalignment of exchange rates and international imbalances of payment were automatically
corrected by the price-specie-flow mechanism
DIFFICULTIES IN THE SYSTEM
1. The problem was every country needed to maintain adequate reserves of gold in order to back
its currency.

Muhammad Havin Maulana Akbar

L201329190406

2.Also transacting in gold was expensive, the costs of loading the gold into the cargo hold
of a ship, guarding it against theft, transporting it, and insuring it against possible
disasters, and Moreover, because of the slowness of sailing ships contibuted to the failure of
this system.
DEMISE OF THE GOLD SYSTEM
In 1914 when the outbreak of the first world war crushed the first economic world order. With
the outbreak of war, normal commercial transactions between the Allies (France, Russia, and the
United Kingdom) and the Central Powers (Austria-Hungary, Germany, and the Ottoman
Empire) ceased. The economic pressures of war caused country after country to suspend their
pledges to buy or sell gold at their currencies' par values.
2. THE BRETTON WOODS SYSTEM (1945-1971)
On brettons woods system. There was an agreement conference which was held in New
hamisphere that created a post-war international monetary system which consisted of 44 country
represantatives. It created IMF( international monetary finance) and World bank to promote
international financial stability.
IMF had agenda to foster global growth and economic stability while the world bank had a
primary function of lending to nations devastated by the world war.
Brettons woods system arised due to world war II impacts that created inflation, unemployment
and an instable political situation. Every country was struggling to rebuild their war-torn
economy.
The Bretton Woods system was a dollar-based gold exchange standard. USD become the key
currency, the U.S. dollar was pegged to gold at $35 per ounce and other currencies were pegged
to the U.S. dollar.. Exachange rate were arrowed to fluctuate by 1% above or below intial base
price.
The fixed exchange rate were maintained by official intervation by central banks in the form of
sales and purchase of dollars with the IMF providing the foreign exchange rate.
ADVANTAGES

Muhammad Havin Maulana Akbar

L201329190406

1.Stabililty of exchange rates removed a great deal of uncertainity from international trade and
investment transactions
2.It also imposed a great deal of discipline on the participating nations economic policies.
3.Technical aspects of the system had practical implications on the participating countries
THE KEY DIFFERENCE BETWEEN GOLD STANDARD AND BRETTON WOODS
The key difference was that the dollar was the only currency that was backed by and convertible
into gold on breeton Woods system while on gold standard other currencies were also allowed to
be convertible into gold
THE DEMISE OF BRETTONS WOODS STANDARD
The system Bretton Woods worked well until the late 1960s. The trade balance of the USA
became highly negative and a very large amount of US dollars was held outside the USA; it was
more than the total gold holdings of the USA.
On 15th Aug. 1971, President Nixon suspended the system of convertibility of gold and dollar
and decided for floating exchange rate system and By March 1973, the major currencies began to
float against each other in which values being determined by supply and demand in the foreignexchange market.
Question 2
A. Euro

: 1,22/$ (indirect quote)

B. Russia

: Rb130/$ (indirect quote)

1$
= 130 Rbl =

: $0,72/C$ (direct quote)

1C $
= 0.72 $ =0,01068376

0,00769/Rbl
C. Canada
/$
D. Denmark

1$
1,22 = 0,8196/

: $0,1644/DKr(direct quote)

1 DKr
= 0,1644 $ =6,08272 /$

Muhammad Havin Maulana Akbar

L201329190406

Question 3
The case for floating exchange rates has two main elements:
1. Monetary policy autonomy
2. Automatic trade balance adjustments
Supporters of fixed exchange rates focus on monetary discipline,
uncertainty, and the lack of connection between the trade balance and
exchange rates.
1. Provides monetary discipline
2. Minimizes speculation
3. Reduces uncertainty
There is no real agreement as to which system is better
We know that a Bretton Woods-style fixed exchange rate regime will
not work
But a different kind of fixed exchange rate system might be more
enduring
could encourage stability that would facilitate more rapid growth
in international trade and investment
Question 4
places an order
applies for a letter of credit
issues a letter of credit
ships the goods on a common carrier
presents a draft, endorses the bill of lading
accepts the draft, taking possession of the
documents
notifies of the arrival of the documents

Muhammad Havin Maulana Akbar

L201329190406

receives payment