Question

Provide a comparison of the gold standard, the Bretton Woods system, and a flexible exchange rate regime. Include some discussion of the pros and cons of each. (12 points)

Answer 1

Gold standard - When the currency is pegged with a fixed quantity of gold and treated as a monetary basis, it is known as Gold standard.
Pros : It helps in maintaining long run economic stability and prevents the economy from inflation by restricting government intervention.
Con : In the short run, the economy is not stable due to high price volatility. And since money supply is associated with gold supply, monetary policies will not be effective.

Bretton Woods System - This system was established to control the value of money by pegging the currency with US dollar which in turn was pegged to gold.
Pros : It helped in trade expansion among different countries all over the world. It helped in maintaining a lower rates of inflations for almost all the countries.
Con : Lack of efficient mechanism to adjust balance of payments as a result of which countries will balance of payments deficit suffered a lot.

Flexible exchange rate regime - In this system, the exchange rate was allowed to be automatically adjusted to the market forces of supply and demand with the intervention of any authorities.
Pros : It helps in automatic adjustments of balance of payments, domestic economies are protected from sudden external shocks.
Con : Since the exchange rate is flexible, it fluctuates more often which leads to uncertainty and volatility.

Compared to Bretton woods system and gold standards, the flexible exchange rate regime has proven to be more effective in controlling the balance of payments.