Notes for a Freshmen College Microeconomics Course

IV. Official Reserve Account Transactions
A. Foreign Currency Exchange
B. Sale of Gold
C. Special Drawing Rights with the IMF
D. Reserve Status at the IMF
E. Holdings of the US Treasury
V. What Affects the Balance of Payments
A. Relative Rate of Inflation (higher inflation worsens
the balance of payments)
B. Political Stability (stability improves the balance)
VI. Exchange Rates
A. Flexible/ Floating Exchange Rate
The rate is determined by the supply and demand
of currencies.
B. Appreciation of a Currency
An increase in the value due to increasing demand
for the nation's goods in world trade
Curve: An increase in demand for German-made
goods means higher demand for German Marks,
and a higher dollar cost of the DM:
C. What Determines Exchange Rates
1. Interest Rates (Higher rate=stronger currency)
2. Productivity (Higher prod.=stronger currency)
3. Changes in Product Preferences
4. Economic/ Political Stability
5. Relative Income Changes
VII. The Gold Standard and the IMF
A. Pegged/ Fixed Exchange Rates
They were based upon the gold standard. From
1933 to 1971 the $ was pegged at $35/ oz of gold
B. The Bretton Woods System (1945)
Established the IMF to help nations deal with their
balance of payments problems. Nations had to
intervene to keep the value of their currencies
within 1% of declared par value.
C. Special Drawing Rights (SDR's) (1967)
The IMF allocates SDR's to member nations based
upon a quota system
D. Removal of the Dollar from the Gold Standard
After Dec. 18, 1971 the $ was no longer exchange-
able for gold.
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