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FINANCIAL ENVIRONMENT Chapter Three

FINANCIAL ENVIRONMENT Chapter Three. Financial Environment Chapter Three. 1. Historical Role of the US Dollar 2. The Gold Standard 3. The Interwar Years 4. Development of the Current International Monetary System 5. Fixed versus Floating Exchange Rates 6. Foreign and Foreign Exchange Rates

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FINANCIAL ENVIRONMENT Chapter Three

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  1. FINANCIAL ENVIRONMENTChapter Three John Wiley & Sons, c 1998

  2. Financial EnvironmentChapter Three • 1. Historical Role of the US Dollar • 2. The Gold Standard • 3. The Interwar Years • 4. Development of the Current International Monetary System • 5. Fixed versus Floating Exchange Rates • 6. Foreign and Foreign Exchange Rates • 7. Balance of Payments John Wiley & Sons, c 1998

  3. 1. Historical Role of the US Dollar • absence of a universal currency • exchange of the dollar based on gold ounce • common denominator in world trade • the dollar in the 70’s, 80’s and 90’s. John Wiley & Sons, c 1998

  4. 2. The Gold Standard • par values • three major features • system of fixed exchange rates • limited rate of growth in a country’s money supply • automatic adjustment tool • problems John Wiley & Sons, c 1998

  5. 3. The Interwar Years 1919-1939 • the English pound sterling position • the US dollar position John Wiley & Sons, c 1998

  6. 4. Development of Today’s International Monetary System • The Bretton Woods Conference in New Hampshire in 1944 • ruled out return to the gold standard • free floating exchange rates could not work • need for a monetary system to recognize that exchange rates were both national and international John Wiley & Sons, c 1998

  7. 4. Development of an International Monetary System (cont) • The International Monetary Fund (IMF) • to promote international monetary cooperation • to facilitate expansion and balanced growth of international trade • to promote exchange stability • to assist in establishment of a multilateral system of payments • to give members temporary use of availability of funds • to shorten duration and lessen degree of disequilibrium John Wiley & Sons, c 1998

  8. 4. Development of an International Monetary System (cont) • The International Bank for Reconstruction and Development • The World Bank • Twin Crises • oil prices • foreign debt John Wiley & Sons, c 1998

  9. 5. Fixed versus Floating Exchange Rates • problems • free (clean) float • managed float • Exhibit 3-1 “Foreign Exchange Rate Fluctuations over Past 30 Years” • Currency Blocs John Wiley & Sons, c 1998

  10. 6. Foreign Exchange and Foreign Exchange Rates • Purchasing Power Parity (PPP) • Exhibit 3-2 “ The Big Mac Index” • Forecasting Exchange Rate Fluctuation • Exhibit 3-3 “Factors Influencing Foreign Exchange Rates” • Coping with Exchange Rate Fluctuations • Spot versus Forward Foreign Exchange • Exhibit 3-4 “Exchange Rates Fri May 23, 1997 • Exchange Rate Pass Through John Wiley & Sons, c 1998

  11. 7. Balance of Payments • Exhibit 3-5 US Balance of Payments 1980-1996 • trade balance • current account balance • capital account • Direct Investment • Portfolio Investment • The Internal and External Adjustments John Wiley & Sons, c 1998

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