Suppose we consider a situation under the Bretton Woods IMS. Suppose that Jamaic
ID: 1194440 • Letter: S
Question
Suppose we consider a situation under the Bretton Woods IMS. Suppose that Jamaica sets a par value of 1.5 Jamaican dollars per U.S. dollar. Answer the following questions:
1) Under this system what range of values of the Jamaican dollar - dollar exchange rate are acceptable?
2) Suppose that the market exchange rate equals 2 Jamaican dollars per U.S. dollar. Should the Jamaican government intervene in this market? If so, how should they intervene?
3) Demonstrate the effects of the proposed intervention graphically. (Hint: Be sure to indicate the par value, acceptable range of exchange rates, the market spot exchange rate and shifts of the appropriate curves.)
Explanation / Answer
A new exchange rate system was established in 1976 at a meeting in Jamaica. The IMF’s original system was one of fixed exchange rates; the U.S. dollar remained constant with respect to the value of gold and other currencies operated within narrow bands of value relative to the dollar. Following President Nixon’s suspension of the dollar’s convertibility to gold in 1971, the international monetary system was restructured via the Smithsonian Agrrement, which permitted a devaluation of the U.S. dollar, a revaluation of other currencies and a widening of the exchange-rate flexibility bands. These measures proved insufficient, however, and in 1976 the Jamaica Agreement eliminated the use of par values by abandoning gold as a reserve asset and declaring floating rates to be acceptable.
The rules that were agreed on then are still in place today. Under the Jamaican agreement floating rates were declared acceptable, gold was abandoned as a reserve asset, total annual IMF quotas - the amount member countries contribute to the IMF - were increased to $41 billion – today they are about $300 billion. Since 1973, exchange rates have been more volatile and less predictable than they were between 1945 and 1973 because of the 1971 and 1979 oil crises, the loss of confidence in the dollar after U.S. inflation in 1977-78, the rise in the dollar between 1980 and 1985, the partial collapse of the EMS in 1992, the 1997 Asian currency crisis and the decline in the dollar from 2001 to 2009.
The Jamaica meeting in 1976 revised the IMF's Articles of Agreement to reflect the new reality of floating exchange rates. The meeting in January 1976 revised the IMF's Articles of Agreement to reflect the new reality of floating exchange rates.
When the market exchange rate equals 2 Jamaican dollars per U.S. dollar the government will intervene in the market by manipulating its monetary policy accordingly. It will pump more money in the market so that the Jamaican dollar are in equilibrium.