European Monetary System Case Study

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a) Evaluate the European Monetary system. (12)

The European Monetary System was an arrangement between European countries which tried to control the exchange rate by linking their currencies to one another. The main aim was to stabilize prices and exchange rate between European countries. European Monetary system archived stability of exchange rate and lower inflation rate. However, continued differences in economic growth rate between member countries lead to trade imbalances. The basic elements of the European Monetary System were exchange rate were agreed in the interval of plus or minus 2.25 percent with a wider range of plus or minus 6 percent, an Exchange rate mechanism, an extension of European credit facility and the European monetary
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The Maastricht Treaty of 1992 pushed for a single currency within members as the exchange rate was being aligned. The treaty resulted in the Economic and monetary Union (EU) a central feature of the European Monetary System is a common unit of currency which was determined by weighing averages contributions of participating members made by pooling amounts of member nations ' currency, Evrensel (2013).

b) Explore the advantages and disadvantages of the gold standard system. (8)

Gold standard is a monetary system where a unit of a currency is measured at a fixed quantity of Gold, Michael (2008).
Advantages
i. It controls or acts as a limit for government or central banks in the issuance of paper currency this result in price stability. Inflation is low under gold standard as the money supply should match the gold supply, Michael (2008). ii. The international trade has some assurance that the exchange rates are kept at a fixed rate and thus reducing uncertainty in international trade. iii. It does not allow savers to earn a return below the inflation
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Multinational Corporations and host country have a working relationship which can be affected by political events in the host nation. Political events such as stability, elections and change of government can either bring positive or negative effects on the Multinational Corporations. When there is political instability in a host nation the local operations can be closed or suspended. Examples that can be cited in Zimbabwe are that of Johnson and Johnson which closed its operations in Zimbabwe and the recent announcement by Standard Chartered that some companies cannot transfer large United States Dollars amounts outside
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