Ben HickmanFIN480AtkinsT/Th 2:20pmChapter 3 Homework1. A country’s money supply was limited to the amount of gold held by its central bank or treasury. This means a country mist follow this formula: Ounces of gold*exchange rate= local currencies outstanding. An example of this could be if the US had 500000 ounces of gold and our fixed rate of exchange was $500 per ounce of gold, that country could have $500000000 outstanding. 2. Some macroeconomic variables that can cause of devaluation include low interest rates compared to other counties, and continuing balance of payments. Other events such as unexpected external shocks can mess with macro of the world’seconomics as well. 3. Advantages with fixed rates included stability in international prices of trade. When prices are stable this helps promote international trade, and lessen the uncertainty of currency value. They are also good because they anti-inflationary because they follow a strict monetary. On the other hand, fixed rates may become inconsistent at times with. Fixed exchange rates are very unstable and nearly impossible to maintain. An example of this is when these rates change administratively; it is usually too large o one time cost to the nations economic stance. 4. The impossible trinity is the idea of three characteristics to create the ideal world currency. The three legs the trinity include a stable exchange rate, full financial integration, and monetary independence. Although this is hypothetically the perfect world currency it is not possible to achieve all three due to the laws of world economics.8. The Euro affected the market because all of the member countries must follow the EMU rules to maintain their status. Countries who participate in the Euro were able to enjoy cheaper transaction costs when they traveled into different EMU countries. They also did not have to worry about currency confusion and risks when trading between countries. 10. The IMF was created to aid countries with exchange rates and balance of payment problems. It also helped defend against seasonal, or random economic occurrences that could affect economics at a macro level. 11. Special Drawing Rights are international reserve asset created by the IMF to supply foreign exchange reserves. It was able to define as a unit of account for the IMF and was the base against some countries peg exchange rates.13. The ideal currency is called the Impossible Trinity. The three attributes are stable exchange rate, full financial integration, and monetary independence. 14. The fixed exchange rates failed because of diverging national monetary and fiscal policies. Also, when there were different inflation rates and external events between each country it caused some instability throughout the macroeconomic world. Problems:P1. 20.67/410=$.0504P3. .7500/1.32=.476P4. 3.2-5.5/5.5=-.418. Devaluation of 41.8%P5. 500000/12.42=$40257.65 MondayP6. 26.33/23.1= 1.1298P9. 1650000/197=8682.21, 8682.21-8375.63/8375.63=3.68%P11.