Question

1. Briefly describe the key types of players in the global monetary and financial systems.

2. Briefly describe the main foreign exchange systems countries use. Give examples.

3. What were the key causes of the Global Financial Crisis of 2008-2009?

Answer 1

1) key players in global financial and monetary system-----

# Global institutions-----

* International Monetary funds( IMF)

*Bank for international settlement

*National Agencies

#Govt departments------

*European Central Bank

*Federal reserve Bank

*Finance Ministry

# Commercial Banks-----

*Bank of America

*Mizuho bank of Japan

# National Stock Exchange and money market

# Private Institutions

* MNCs

# National Stock Exchange & Bond Market

# Banks and hedge funds

#Regional Institutions

* Euro zone

2)Main foreign exchange systems countries use-----

#Fixed foreign exchange system---- It is the oldest system of exchange rate. It was also termed as gold system of exchange rate ,when currency of two countries were valued in terms of gold ,and then the exchange rate was determined between two currencies in terms of gold.,but presently ,as gold rates are not fixed ,this system works as per the rates specified by govt.

A fixed rate can make a country ' s currency a target for speculators.They can short the currency artificially driving its value down.

Examples for fixed exchange rate system------( 2019 data)

* Iraq has fixed dinar 1192•11 for 1 US dollar

* Nepal has fixed 1•61 rupee for one Indian rupee

*UAE has fixed 3•67 dirhams for 1 US dollar

# Floating Exchange rate System-----

Under tthis system, the exchange rates are flexible ad these are determined as per demand and supply for foreign exchange.There is no intervention of govt in floating or flexible exchNge rate system.

For Example-----Initially the exchange rate between dollar and pound is $2= 1 pound.let us suppose, now ,at this rate, people in UK start buying more of US goofs, now demand for dollar will i crease ,so the exvhange rate between teo currencies will continue to move till it reaches a new exchange rate , say $1•50= 1 pound

# Managed Exchange rate System----- This system lies between both above extreme systems of exchange rate.Under this system, exchNge ray is basically determined by market forces but govt actively intervenes in foreign exchange market to implement the monetory policies.

For Example---- The govt needs to increase Aggregate demand in economy by increasing exports, that case it will depreciate its currency value in terms of other currency to which it needs to increase exports.

3)Key causes of global financial crisis in 2008-09----

It was the period when the global financial markets and banking system undergone a setback.The range of factors mainly causing the crisis were-----

* Increased borrowing by banks and investors---Many investors and banks in US started borrowing to buy assets ,that is leverage trading, in the hope of potential profits due to favourable market conditions but it happened completely opposit as they suffered huge losses due to market crash.

* Regulation of subprime lending-- subprime lending means lending when there is high default risk.It happened when large amounts of loans provided to borrowers without considering thier inability to pay back .

* Excessive risky borrowing- with expectation of housing price rise---- During 2007, the housing prices were getting high and due to expectations of further rise in house property prices people excessively indulged in heavy borrowings least bothering how to pay it back.

These were key reasons of the financial crisis in 2008-09.