Despite this fact, it would be simplistic to state that G8 should not have the ability to make financial decisions independent of the UN and other international influence. As the countries that have provided the majority of financing for the world's poorest countries, it may be that the continued financial health of those countries depends upon them getting a financial benefit from such financial assistance. Therefore, the current world economy may actually depend on the ability of G8 to operate independently from the broader international community.
Q3: How does the Fisher effect impact the ability to forecast currency exchange rates? If the real interest rate is constant across borders, one would expect a constant currency exchange rate, but this does not occur. On the contrary, currency exchange rates are subject to a tremendous amount of fluctuation. Why does this occur?
A3: The Fisher hypothesis posits that in integrated capital markets, the real interest rate is not dependent upon monetary measures like the nominal interest rate, but instead reflects a relationship between the nominal interest rate and the expected rate of inflation. The Fisher hypothesis is largely based on the principle of monetary neutrality. Therefore, changes in a country's currency's exchange rate can be expected to catch up quickly with internal changes in that country's economy. However, the Fisher effect cannot always be used in calculating exchange rates, especially when one of the countries has a prohibitive economy. For example, many developing countries place great internal restrictions on nominal interest rates and rates of inflation, which make capital market integration more difficult. These restrictions can mask a country's actual financial condition, making it impossible to determine the appropriate currency exchange rate.
Q4: What could one expect if the international community made the decision to convert to one form of international currency, rather than using different forms of currency in each country?...
Currency has no intrinsic value; it simply reflects the value that it is assigned by those who use money as a means of trading. Anything can be labeled currency and even when currency is based on something that appears to have intrinsic value, like a gold standard, still relies on an external determination of value. Therefore, it does not seem likely that converting the world's monetary systems to one unit of currency would have a profound and immediate positive effect on the world economy. For example, the United States uses the dollar as its currency, but one still sees a tremendous difference in the value of a dollar based on the geographic area within the United States. Homes that sell for upwards of $1,000,000.00 in California sell for under $100,000.00 in other parts of the country. Even the prices for small commodities, like milk and eggs, vary widely according to geography. Not surprisingly, salaries vary as well. Therefore, a country with an average weekly wage of $5.00 would continue to charge far less for consumer products than a country with an average weekly wage of $500.00. That said, there is one persuasive argument for the use of one form of international currency: depression protection. Rather than seeing money quickly devalued in an international market by increasingly unfavorable rates of exchange, citizens of countries experiencing economic depressions and unchecked inflation would continue to have the same relative wealth to other countries that they had prior to the recession or depression. If people were able to move to a more financially advantaged area, they might be able to do so with some financial resources. However, while such a system might be good for individuals, it would probably hurt the international economy in the long-term, by creating a financial drain on countries already suffering economic…
