Binary options lexicon: The International Monetary Fund

binary-options-lexicon-international-monetary-fundThe International Monetary Fund (IMF) is an internationally oriented institution involving nearly 188 countries. Its’ role is to ensure the proper functioning and stability of the international monetary system, as well as managing monetary and financial crises. The institution provides loans to countries facing difficulties, risking financial, commercial or budgetary level failure.

History of the International Money Fund: The IMF was established in 1944 at the Bretton Woods Conference, with a similar role to ensure stability within the international monetary system. The institution emerged as a result of the 1929 crisis, which had a catastrophic impact on the world economy. In 1976, the IMF’s role refocused to the resolution of debt issues in those developing nations that had abandoned the fixed exchange rate system.

Operation of the IMF: The IMF operates upon the context of a majority election where votes are weighted as a function of the “quote part”. The “quote part” is the amount which each State must remit to the IMF, and the amount is calculated in relation to its’ economic strength. For this reason, the US holds nearly 25% of the votes and has the right to veto within the organization.

Twenty-five percent of this quote-part must be paid in gold, and the remainder in currency. In the case of a payment imbalance, which could threaten the monetary stability in the foreign exchange market, member states can recuperate 25% of their quote-part. This is known as “drawing rights” which allow nations to buy their national currency. When the IMF grants loans to a member state, the state must implement adjustment policies recommended by the institution to resolve problems causing depreciation.

Policies advocated by the IMF: To help countries facing difficulties, the institution works in concert with other international organizations, through granting loans (like the world bank) and negotiates structural adjustment policies with the countries. These plans generally advocate freedom in the labor market, opening the country up for foreign capital, and the reduction of state intervention through privatization. Additionally, these policies seek to reduce public spending and are associated with increases in the tax burden; both are intended to restore the budgetary equilibrium of the state benefitting from the aid.

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