What is the gold standard, and when did the U.S. follow it? What are the differe
ID: 1126072 • Letter: W
Question
What is the gold standard, and when did the U.S. follow it? What are the different types of exchange rates used in the world today? What exchange rate system does the U.S. use currently? What is the Bretton Woods agreement? Know the history and other relevant facts of this agreement . Be able to calculate exchange rates between two currencies What is Purchasing Power Parity? . What factors greatly affect SR exchange rate fluctuations? Can you use the "Big Mac" Index to compare implied exchange rates? What is the Euro? What is the Euro Zone? What Central Bank controls the Euro?Explanation / Answer
1. The gold standard is a monetary system in which a country links the value of its currency to gold. It means a country sets a fixed price of gold to buy & sell at that price in gold standard. This fixed price is used to calculate the value of currency. Anyone holding the currency could exchange it for an agreed amount of gold from country’s gold reserves. US followed gold standard in 1780.
2. Now a days there are two types of exchange rates.
Fixed exchange rate: In fixed exchange rate a country’s currency doesn’t change as per the forex market. The country pegs its currency to other important currencies. The central bank of country is responsible to maintain the fixed value of its currency. Example: China,
Flexible exchange rate: Flexible exchange rate is a system in which currency price is set by foreign exchange market or forex as per demand & supply in relation to other currencies. The flexible rates are determined by currency traders in forex market as per demand & supply.
3. The U.S uses flexible exchange rate system. It allows its currency to be openly traded in forex market as per demand & supply.
Euro: Euro is the official currency of the 19 member “European Union” states. It is second most traded currency in the world.
Eurozone: Eurozone is an economic region of “European Union” countries who have Euro as their common currency & sole legal tender. We can also call it a monetary union of European countries.
Central bank: European central bank (ECB) controls the Euro.
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