Briefly describe the current international monetary system. How does the current system differ from the system that was in place prior to August 1971?

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Briefly describe the current international monetary system. How does the current system differ from the system that was in place prior to August 1971?

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With the growth in demand for exotic foods, Possum Inc.’s CEO Michael Munger is considering expanding the geographic footprint of its line of dried and smoked low-fat opossum, ostrich, and venison jerky snack packs. Historically, jerky products have performed well in the southern United States, but there are indications of a growing demand for these unusual delicacies in Europe. Munger recognizes that the expansion carries some
risk. Europeans may not be as accepting of opossum jerky as initial research suggests, so the expansion will proceed in steps. The first step will be to set up sales subsidiaries in France and Sweden (the two countries with the highest indicated demand), and the second is to set up a production plant in France with the ultimate goal of product distribution throughout Europe.
 
Possum Inc.’s CFO, Kevin Uram, although enthusiastic about the plan, is nonetheless concerned about how an international expansion and the additional risk that entails will affect the firm’s financial management process. He has asked you, the firm’s most recently hired financial analyst, to develop a 1-hour tutorial package that explains the basics of multinational financial management. The tutorial will be presented at the next board of directors meeting. To get you started, Uram has supplied you with the following list of questions:
d. Briefly describe the current international monetary system. How does the current system differ from the system that was in place prior to August 1971?

Explanation & AnswerSolution by a verified expert

Sample Response

The system through which the governments circulate money in the economy is referred to as the monetary system. Current international monetary system is complex in nature. Certain groups of countries follow a floating exchange rate system, while some countries have pegged their currency to a particular nation, while some of the nations have formed a monetary union to share a common currency such as European union.
 
According to the International monetary fund (IMF), 65 nations have adopted a free floating rate monetary system. In such a monetary system, the currency exchange rate is determined by the total volumes of bilateral trades between the countries. Thus there is very less government intervention in influencing the exchange rates. It is the most popularly followed monetary system. On the other side, certain nations have pegged their exchange rate to a particular currency (mostly dollar). Thus their currency valuation depends on the fluctuation in the pegged currency. Some countries have grouped to form a monetary union, where they share the same currency. The largest among such unions is the European Monetary Union (EMU). There are 19 countries in EMU that have adopted "euro" as their common currency.
 
However, prior to August 1971, the international monetary system was based on the fixed rate system. In a fixed rate system, the valuation of currency is linked to the gold reserves of the country or to the currency of another country. As the value of gold reserves changes, the value of currency also changes.Also, frequent changes in gold reserves changes the demand for the currency, which in turn leads to unequal distribution of currencies across countries. This was the major shortcoming of the gold standard system.
 
Thus, it can be inferred that the current monetary system is more flexible in nature as it allows the countries to adopt the exchange rate system depending upon their economic, monetary and foreign policies. Hence, the current international monetary system overcomes the limitations of the previous systems, as it is flexible in nature and promotes more international trade.

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