Assume that all cows are homogeneous. Explain how the international monetary sys

Question

Assume that all cows are homogeneous. Explain how the international monetary system would operate if all central banks undertook to fix the price of cows in terms of each country's currency. Would you expect large fluctuations in exchange rates under this system? Assume that all cows are homogeneous. Explain how the international monetary system would operate if all central banks undertook to fix the price of cows in terms of each country's currency. Would you expect large fluctuations in exchange rates under this system?

Explanation / Answer

As stated in the question that all central banks in the international market try to fix the price of cows in terms of each country's currency, being cow homogenous. But nominal exchange rates among all countries on the “cow standard” would be determined by the ratio of the price of cows at home of a particular country to that abroad in each country. In addition, central banks would have no control over the number of cows that they had to support. The problem with the “cow standard,” however, is that cows are expensive to transport. Thus,exchange rates could deviate very far from the “cow parity” before it would be worth while to ship cows.

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