Question

Study the following statements. Evaluate whether these statements are TRUE or FALSE (0.5 X 20 = 10 points)

1. Signatories of the Bretton Woods agreements committed to pegging their currency in relation to the gold content of the U.S. Dollar, which was convertible into gold at a rate of $35 per ounce.

2. Economists noted that national governments face an inevitable trade-off between the three policy goals of exchange rate stability, national monetary policy autonomy, and capital mobility. According to the “impossible trinity”, it is only possible for governments to realize one of the three goals at the same time.

3. According to the hegemonic stability theory, the leadership vacuum led to instability and eventually the breakdown of the international financial order.

4. One of the benefits to the US from the dollar’s central global role has been the leverage it provides to encourage worldwide cooperation with US regulatory initiatives.

5. Highly controlled financial markets tend to be associated with liberal democratic governments.

Answer 1

1. Answer is True.

John Maynard Keynes and Harry Decter White are the primary designers of the Bretten Woods Systems. Keynes belief was to form a global Central Bank which is said to be the Clearig Union. Harrys Plan focus towards a lending fund and greator role for US Dollar despite of creating of new currency. At the last stage, the plan which is adopted took ideas from both Harry and Keynes and it leans to more towards Whites Plan.

Later when the Bretton Woods System became fully functional, once introduced, its provisions asked for the US dollars to be pegged to the value of gold.There after all other currencies were then pegged to US dollar value. The price set was $ 35 for an ounce at the time when the exchange rate applied. Hence the given statement is true.

2. Answer is False.

As per Impossible trinity, it is impossible in international economic to have free capital flow, fixed rate of exchange and soveriign monetary policy at the same time. Only a Central Bank is able to realise two of these three goals simultaneously. Any one of these 3 objectives have to be forgone by the Central abank. The Government which tried to realise these three goals at the same times had failed. Hence 3 combinations option of this policy an be put forward by Central Bank. Hence the statement is false.

3. Answer is True.

Hegemonc Stability Theory follows a theory in which international system will be stable at the time when a single nation state dominate. This state is also known as Hegemon. Thus, if the stage of hegemon vanishes the stability of international system will fall. This will lead to gradual break down of financial terms internationally. Hence the statement is true.

4. Answer is True.

The international role of dollar emerge from 2nd World War. After the world war, the value of dollar rises to a stage where certain other currencies where pegged to dollar, but at the same time, dollar has been pegged to gold which helps to replace the standard of gold.This system brings out high flexibility to US. As a result US enjoys freedom to folow their domestic objectives and to phase balance of payment deficit. It benefits US to get cooperation from US regulatory initiatives. Hence the statemet is true.

5. Answer is False.

Liberal democracy is a form of Government which is also a liberal political ideology where representative democracy functions under the guidelines of classical liberalism.

Economic liberalism is concerned with free markets and private ownership of capital assets. Now a days economic liberalism is also very much concerned with opposed to non capitalist economic orders such as socialism and planned economies. Also its also contrasts with protectionism because of its support towards free trade and open markets.