Explain the functioning of the gold standard.

Since ancient times, gold has been trusted as a way for people to store value, to exchange value, and to measure value. Under a gold standard, each country set a certain number of units of its currency per ounce of gold, and the ratios of their gold equivalence would establish the exchange rate between any two currencies. In essence, currencies were pegged to gold.

Describe the purposes of the IMF.

The basic idea of the IMF is that a workable international monetary system is in the interests of all nations. Its Articles of Agreement outline the purpose of the fund in six points: to promote international monetary cooperation, to facilitate the expansion and balanced growth of international trade, to promote exchange stability and orderly exchange arrangements among members, to assist in the establishment of a multilateral system of payments, to make the fund's resources available for balance-of-payments corrections, and to shorten the duration and lessen the disequilibrium of members' balance of payments.³⁵

Appreciate the accomplishments of the Bretton Woods system and the developments shaping the world monetary system from the end of World War II to the present.

The gold exchange standard, established at Bretton Woods after World War II, worked until the 1970s, when it collapsed due to inflation and the surplus of U.S. dollars held outside the United States. Until then, the Bretton Woods system provided monetary stability that supported the growth of international trade.

Describe the purpose of the World Bank.

The World Bank lends money for development projects in middle-income and creditworthy poor countries. It provides low-interest loans and grants for projects designed to help countries develop infrastructure, health and education, and other areas connected to development.

Discuss the purpose of the Bank for International Settlements.

The Bank for International Settlements operates as a central bankers' bank. In addition, it serves as a forum for central bankers' discussions, leading to international monetary cooperation; as a center for research; and as an agent or trustee for governments in various international financial arrangements.

Discuss the floating exchange rate system.

There are three basic arrangements found in the floating exchange rate system: a free float, a managed float, and a fixed peg. Under a free (clean) float, market demand and supply regulate the exchange rate. In the managed (dirty) float, governments may intervene in the currency markets as they perceive their national interests to be served. In a fixed peg, the value of a currency is set at a fixed rate to another currency. There are other modifications of these three basic approaches, including having no currency and using that of another country; using different approaches to the peg, including operating it within a band or allowing it to crawl; having a currency board; and managing a floating exchange.

Describe the development of the common currency area for the euro.

The euro zone, established by the Maastricht treaty, began trading only in euros in 2002. There are presently 12 members in the euro zone, and many of the newly acceding countries want to join. Slovenia will be joining in 2007.

Explain the role of the balance of payments (BOP).

The balance of payments is a statistical record of a country's transactions with the rest of the world. From a business perspective, the BOP helps businesspeople predict what sort of economic environment might develop in the country.

Discuss the major BOP accounts.

The major BOP accounts are the current account, which tracks the net changes in exports and imports of goods and services; the capital account, which records the net changes in a nation's international financial assets and liabilities; and the official reserves account, which deals with the government's holdings of foreign currency, gold, and, possibly, SDRs.

Explain the uses of special drawing rights (SDRs).

SDRs were established by the IMF to replace the U.S. dollar as the main central reserve asset. They have not yet done so. SDRs do not circulate; they are an accounting entry.