Under the fixed exchange rate system, what was the currency against which all other currency values were defined? Why?

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Under the fixed exchange rate system, what was the currency against which all other currency values were defined? Why?

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Under the fixed exchange rate system, what was the currency against which all other currency values were defined? Why?

Explanation & AnswerSolution by a verified expert

Explanation

Fixed exchange rate system is a system where the central bank of the country uses an open market mechanism and is responsible to buy or sell the country's currency at a fixed price, in order to maintain its pegged ratio. When the fixed rate system was a popular monetary system, all the currencies were defined against the U.S. dollar. During the period of 1945 to 1971, the U.S. was highly involved in foreign aids and foreign wars. Thus, most countries had enough reserves of the U.S. dollar. As a result, dollars were universally accepted for transaction purposes. Thus, most countries preferred to link their currency with the dollar, as it provided a relatively stable benchmark for international trade.

Verified Answer

Under the fixed exchange rate system, most of the currencies were linked to the U.S. dollar. This is because the U.S. dollar was universally accepted for transaction purposes.

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