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The Bretton Woods Agreement

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Introduction:
In this essay, the reader will recognize and have the clear knowledge why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve; correspondingly, how the central banks intervene in the foreign market exchange will be as well made known. Moreover, the reader will as well comprehend what the Bretton Woods Agreement is all about, and its ability to influence foreign exchange rates to fluctuate freely.

Why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve?

The money supply is tied to interest rates as study showcase. If the Federal Reserve increases interest rates, the demand for loans will plummet, and therefore the increase rate of …show more content…

Lesser mortgages generally equal little demand for an increase in the money supply; the opposite applies for larger mortgages. Prior to that, the Fed, by controlling interest rates, controls how much demand there is for an increase in the monetary supply, in other words, A rise in interest rates leads to reducing the money supply and also leads to reducing employment and economic growth. In the long run, money supply does not affect the output, in the short run, however, changes in money supply can affect the output. That is why simultaneous targeting for interest rate and the money supply is sometimes difficult to achieve. Similarly, it is sometimes more impossible than increasing sales without increased cost in the business world.

How central banks intervene in foreign exchange markets?
A central bank will purchase or sell a currency in the foreign exchange market in order to raise or lower the value its nation’s currency possesses against an alternative currency, Wright, R. E., & Quadrini, V. (2009). This is recognized as currency intervention, central bank intervention, or as Forex market intervention. When a nation’s currency is …show more content…

The rules further sought to encourage an open system by committing members to the convertibility of their respective currencies into other currencies and to free trade. Significantly, the Bretton Woods agreement had on the ability of foreign exchange rates to fluctuate freely by fixing foreign exchange rates, and at the same time, Bretton Woods inhibited the ability of foreign exchange rates to fluctuate freely as well (Bordo, 1993). In addition to that, Bretton Woods Agreement is designed to solve issues happened during the gold standards. During the gold standards, many nations had fixed exchange rate based on gold. Bretton Woods System included several characteristics. It was a fixed exchange rate system based on gold and US dollar.

References:
Bonser-Neal, C., & Tanner, G. (1996). Central bank intervention and the volatility of foreign exchange rates: evidence from the options market. Journal of International Money and Finance, 15(6), 853-878.
Wright, R. E., & Quadrini, V. (2009). Money and banking. Nyack, NY: Flat World Knowledge,

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