Question

4. Study Questions #4. Ch 14. Evaluate the following statement explaining the philosophy and operation of the Bretton Woods system of adjustable pegged exchange rates. True or False: The main feature of the adjustable pegged system was that currencies were tied to each other to provide stable exchange rates for commercial and financial transactions. When the balance of payments moved away from its long-run equilibrium position, a nation could re-peg its exchange rate via devaluation or revaluation policies. True False

Answer 1

True

Step-by-step explanation:

The main goal or philosophy of the Bretton Woods system was to provide for global monetary stability, that would result in financial and commercial stability, because a steady value of the currencies around the world meant less risk and less uncertainty for investors, firms, goverments, and consumers.

However, the system provided some flexibility, because it took into account the fact that sometimes countries face devaluations or reevaluations of their currencies due to factors outside of their controls, such as currency especulation events, or unexpected disasters.

To determine the level of flexibility, and aid countries in this process, the International Monetary Fund was created. The IMF, during and after the years that the system was valid, helped many countries battle currencies crisis by providing economic and technical advice, and also by providing cheap monetary loans in exchange for policy concessions.