While nations of the world had previously tied their currencies to the gold standard, that practice abandoned in favor of linking currencies directly through floating exchange rates. Due to the dominance of the United States in economic and financial matters, the US dollar became the "reserve currency" of the world. Other countries tied their exchange rates to the dollar.
1. What responsibilities did that impose on the US? What were the risks to other nations?
2. Explain the relationship between the inflation rates in two countries and their exchange rates.
1. Responsibilities on the US
Due to linking of other currencies with the US dollar, it imposes responsibility on the US that Federal Reserve monetary policy is made with the consideration of the global economy rather than the US only. It is because the Federal Reserve monetary policy has a significant influence on the foreign exchange value of the dollar. It is also the responsibility of the US to maintain fixed exchange rates, so that the growth of the other economies could be protected (Ravenhill, 2011). At the same time, it is also a major responsibility of the US for having the dollar as the dominant currency in the market to support the global financial markets by issuing the government debts to foreign countries continuously by honoring the interest payments over the existing ...
This response explains the responsibilities that are imposed on the US due to the US dollar becoming the "reserve currency" of the world. Also, the relationship between the inflation rates in two countries and their exchange rates is discussed.