Question

)(a)Briefly explain why the Classical Gold Standard period is described as a regime of FIXED Exchange

     Rate and suggest some reasons why you think many people in business, academia and politics still

     yearn for a return to the era.

     (b)How did BRETTON WOODS create a system that ultimately led to its own demise?

   (c)Suppose a FACTOR will buy an exporter’s Receivables at 2% per month discount. In addition, the

     Factor will charge an extra 1.95 % fee for nonrecourse financing. If the exporter decides to factor

     $2.5 million in 180-day receivables without recourse, how much will the exporter receive?. On an

      annualized basis, determine how much this transaction will cost the Factor.             

Answer 1

Part(a): Under the classical gold standard, each country fixed the worth of its currency in terms of ounces of Gold and the rate between currencies was similary decided by their relative worth in terms of Gold. Currencies were freely exchangeable in Gold at the fixed exchange rate and this is the reason why it was referred to as the Fixed Exchange Rate system. It was liked by academics, etc because it provided stability to the financial sector from fluctuations based on demand and supply.

Part(b): The Bretton Woods system pegged the value of each currency in terms of the US Dollar and the rate for US Dollar was fixed in relation to Gold. The main flaw was that policies of each country led to different inflationary and deflationary conditions and it became difficult to maintain the fixed peg, leading to the demise of the system.