【正文】 ance.8. Explain the arrangements and workings of the European Moary System (EMS).Answer: EMS was launched in 1979 in order to (i) establish a zone of moary stability in Europe, (ii) coordinate exchange rate policies against the nonEMS currencies, and (iii) pave the way for the eventual European moary union. The main instruments of EMS are the European Currency Unit (ECU) and the Exchange Rate Mechanism (ERM). Like SDR, the ECU is a basket currency constructed as a weighted average of currencies of EU member countries. The ECU works as the accounting unit of EMS and plays an important role in the workings of the ERM. The ERM is the procedure by which EMS member countries manage their exchange rates. The ERM is based on a parity grid system, with parity grids first puted by defining the par values of EMS currencies in terms of the ECU. If a country’s ECU market exchange rate diverges from the central rate by as much as the maximum allowable deviation, the country has to adjust its policies to maintain its par values relative to other currencies. EMS achieved a plete moary union in 1999 when the mon European currency, the euro, was adopted. 9. There are arguments for and against the alternative exchange rate regimes. a. List the advantages of the flexible exchange rate regime. b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime. c. Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime.169。 2022 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.Answer: a. The advantages of the flexible exchange rate system include: (I) automatic achievement of balance of payments equilibrium and (ii) maintenance of national policy autonomy.b. If exchange rates are fluctuating randomly, that may discourage international trade and encourage market segmentation. This, in turn, may lead to suboptimal allocation of resources. c. Economic agents can hedge exchange risk by means of forward contracts and other techniques. They don’t have to bear it if they choose not to. In addition, under a fixed exchange rate regime, governments often restrict international trade in order to maintain the exchange rate. This is a selfdefeating measure. What’s good about the fixed exchange rate if international trade need to be restricted? 10. In an integrated world financial market, a financial crisis in a country can be quickly transmitted to other countries, causing a global crisis. What kind of measures would you propose to prevent the recurrence of an Asiatype crisis.Answer: First, there should be a multinational safety to safeguard the world financial system from the Asiatype crisis. Second, international institutions like IMF and the World Bank should monitor problematic countries more closely and provide timely advice to those countries. Countries should be required to fully disclose economic and financial information so that devaluation surprises can be prevented. Third, countries should depend more on domestic savings and longterm foreign investments, rather than shortterm portfolio capital. There can be other suggestions.11. Discuss the criteria for a ‘good’ international moary system.Answer: A good international moary system should provide (i) sufficient liquidity to the world economy, (ii) smooth adjustments to BOP disequilibrium as it arises, and (iii) safeguard against the crisis of confidence in the system.12. Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Explain why this may be so.Answer: Once capital markets are integrated internationally, vast amounts of money may flow in and out of a country in a short time period. This will make it very difficult for the country to 169。 2022 by McGrawHill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.maintain a fixed exchange rate.13. Assess the possibility for the euro to bee another global currency rivaling the . dollar. If the euro really bees a global currency, what impact will it have on the . dollar and the world economy?Answer: In light of the large transactions domain of the euro, which is parable to that of the . dollar, and the mandate for the European Central Bank (ECB) to guarantee the moary stability in Europe, the euro may potentially bee another global currency over time. A major uncertainty about this prospect is the lack of political (and fiscal) integration of Europe. If Europe bees politically more integrated, the euro is more likely to bee a global currency. If the euro bees a global currency, it will e at the expense of the dollar. Currently, the . derives substantial benefits from the dollar’s status as the dominant global currency – for instance, the . can run trade deficits without having to maintain substantial foreign exchange reserves, can carry out international mercial and financial transactions in dollars without bearing exchange risk, etc. If the euro is to be used as a major denomination, reserve, and invoice currency in the world economy, dollarbased agents will start to bear more exchange risk, among other things. MINI CASE: WILL THE UNITED KINGDOM JOIN THE EURO CLUB?When the euro was introduced in January 1999, the United Kingdom was conspicuously absent from the list of European countries adopting the mon currency. Although the previous Labor government led by Prime Minister Tony Blair appeared to be