In the 1920s the French Government was determined to greatly increase its gold reserves by manipulating its exchange rate. Explain what exchange rate regime the French Government would have chosen for this purpose and explain how it would have achieved its
goal.
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In the 1920s, the French Government aimed to increase its gold reserves by manipulating its exchange rate. To achieve this goal, they would have most likely chosen a fixed exchange rate regime, specifically a gold standard system.
The gold standard system establishes a fixed exchange rate between countries based on the value of gold. Under this regime, the currency's value is directly linked to a specific amount of gold. Therefore, the French Government would have set a fixed exchange rate where one unit of French currency is equivalent to a specific amount of gold.
To increase their gold reserves, the French Government would implement several strategies. One approach they might have used is limiting the amount of currency in circulation, thus reducing the money supply. By reducing the money supply, the French Government could potentially increase the value of their currency and attract more gold into the country.
Another strategy would involve implementing measures to promote a trade surplus. A trade surplus occurs when a country exports more goods and services than it imports. By achieving a trade surplus, the French Government would collect foreign currencies, which they could then exchange for gold, thereby increasing their reserves.
Furthermore, the French Government might have also implemented policies to encourage foreign investors to convert their holdings into French currency, as more foreign currency being exchanged for French currency would increase the demand for French currency. This increased demand would further raise the value of the French currency and potentially attract more gold into the country.
Overall, by choosing a fixed exchange rate regime such as the gold standard system, limiting the money supply, promoting a trade surplus, and attracting foreign investment, the French Government in the 1920s could have attempted to increase its gold reserves and manipulate its exchange rate accordingly.