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In: Economics

As a result of the Bretton Woods system, what happened with the exchange rates? Was it...

  • As a result of the Bretton Woods system, what happened with the exchange rates? Was it fixed? Was it floating? (10p)
  • Why did the Bretton Woods system collapse?
  • Would be such a system feasible nowadays?

Solutions

Expert Solution

ANSWER:-

A).

  • Due to the instability of exchange rate in gold standard, Bretton Woods system came in 1944 after the end of the gold standard.
  • The major advantage of bretton wood system was to enhance the international trade between the nations and to enhance the performance of macroeconomic varibles.
  • In the system, central banks of all nations decide to fix exchange rate between nations and United States. In the bretton wood system, fixed as well as floating exchange rate ayatem came in light.
  • It is the system in which, all the currencies were fixed in to United States Dollar and United States Dollar was fixed in to the Gold.
  • The promise was made by the Central Bank of the United States that it will convert the other currencies in to gold at any time and in this way United States Dollar become the central currency.
  • In the way Interbank transactions for the sale and purchase of United States Dollar in the currency market take place.

B).

  • Bretton wood system disappears in 1970 when US president Richard Nixon declared the difficulty of convertibility of US dollar in gold.
  • Due to the short supply of gold and crisis of gold in 1960, this system was close to end.
  • When the Bretton Woods system disappears in 1970 liquidity problem arises because of the short supply of the United Staes Dollar.
  • Due to the liquidity problem free floating managed exchange rate system came in appearance. It is the system managed and controlled at some extent by the Central Bank of the country.
  • It is the system in which Reserve Bank can through control over the flow of United Staes dollar can control on fluctuation in exchange rate with the demand and supply forces.
  • In the free floating exchange rate system, fluctuation arises due to change in demand and supply of currency in the International market.

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Rahul Sunny answered 1 year ago
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