The Economic Dragons Threatening Our World Research Paper

The Economic Dragons Threatening Our World - Research Paper Example Offhand our exercise looks easy, but it is not, and this judgment has less to do with the dearth of facts than with the basic givens. â€Å"A rich East Asian nation with a pegged currency fixed to the US dollar for ten years, supported by a monetary policy of tight capital outward flows and unrestricted inflows is experiencing an upward pressure on the exchange rate.† The question remains: what to do now? Deciding on a strategy depends on a clear understanding of the world’s monetary system, the role that exchange rates play, how they are determined, and what will happen if we do nothing. As Robert Solomon said (1977, cited in Samuelson, 1992): The world’s monetary system is like the traffic lights in a city, taken for granted until it begins to malfunction and to disrupt people’s lives†¦A well-functioning monetary system will facilitate international trade and investment and smooth adaptation to change. A monetary system that functions poorly may not only discourage the development of trade and investment among nations but subject their economies to disruptive shocks when necessary adjustments are prevented or delayed. The world’s monetary system refers â€Å"to the set of policies, institutions, practices, regulations, and mechanisms that determine the rate at which one currency is exchanged for another† (Shapiro, 1996). It is the coordinated way each nation manages its supply of money so that we can buy and sell each other’s goods, doing business by exchanging pieces of paper, the value of which we agree on called money.