The IMF In Action: How Can the IMF Help In Time of Crisis?
International trade touches us all. We drink soda from cans made of aluminum mined in Australia, wear shoes made in Europe, eat fruit from South America, build machinery
from steel milled in Asia, wear clothes made from African cotton, and live in homes built from North American wood. We take it for granted, yet before we can enjoy
these products and materials, traders must negotiate prices and deliver the goods through a network of relationships that literally spans the globe.
In this activity, students are asked to help a country solve its economic problems. They choose between two options after reading some information about the country.
If their choice is the right one, they continue. In the end they discover that devaluing currency sometimes brings down inflation, increases foreign exchange, and
improves the long-term outlook for a troubled nation.
14-18 year olds (9-12 graders, US) studying Social Studies and Economics in school.
National Economics Content Standards
Standard 4 — Role of Incentives
People respond predictably to positive and negative incentives.
Standard 5 — Gain from Trade
Voluntary exchange occurs only when all participating parties expect to gain. This is true for trade among individuals or organizations within a nation, and among
individuals or organizations in different nations.
Standard 6 — Specialization and Trade
When individuals, regions, and nations specialize in what they can produce at the lowest cost and then trade with others, both production and consumption increase.
Standard 10 — Role of Economic Institutions
Institutions evolve in market economies to help individuals and groups accomplish their goals, Banks, labor unions, corporations, legal systems, and not-for-profit
organizations are examples of important institutions . A different kind of institution, clearly defined and well-enforced property rights, is essential to a market
Standard 11 — Role of Money
Money makes it easier to trade, borrow, save, invest and compare the value of goods and services.
Standard 15 — Growth
Investment in factories, machinery, new technology, and the health, education, and training of people can raise future standards of living.
Standard 16 — Role of Government
There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for
national defense, address environmental concerns, define and protect property rights and attempt to make markets more competitive. Most government policies also
Standard 17 — Using Cost/Benefit Analysis to Evaluate Government Programs
Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because
of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued.
Standard 20 — Monetary and Fiscal Policy
A government's budgetary policy and its monetary policy influence the overall levels of employment, output and prices.
- Introduce the lesson by asking, "What often makes products more appealing?" (possible answers: price, style, availability, usefulness) Discuss with
students how, in a market economy, consumers often make buying decisions based upon price. A lower price means more of a product will be sold.
- Hold up a dollar bill and explain that people all over the world like to buy dollars. Ask, "How much does a dollar cost?" Students may be puzzled by
this question, thinking the answer is 100 cents or 20 nickels. But in other countries, the dollar does have a price. Display an enlarged transparency of the
daily exchange rates from a local newspaper and show students how a dollar has different prices when measured in Japanese yen, Mexican pesos, Australian dollars
- Ask, "Would people buy more dollars or fewer dollars if the price went down?" (Answer: more dollars)
- Ask, "If the price of dollars goes down, will people in other countries buy more U.S. goods or fewer U.S. goods?" (Answer: they'll buy more U.S. products
because they'll get more for their money.)
Have students complete the activity and explain the choices they made regarding currency devaluation.
Divide the class into groups of 6, and have each group create a song, skit, poem, poster or panel discussion that explains how currency devaluation can help a country
solve its economc problems.
Currency Devaluation and Revaluation. This link to the Federal Reserve Bank of New York contains an excellent discussion of currency devaluation, though its small
print is difficult to read. It is edited and reprinted at the end of this lesson for use by students as a discussion starter.
Online Extension Activities:
Choose 8 students who have finished their assigned work and have them, in pairs, evaluate the following lessons and present them to the class.
Teaching ESL in Asia: The Economic Crisis Has Changed Everything. This site compares exchange rates in a number of Asian countries and discusses the costs and benefits
of working in those countries, based upon the depreciation of their currencies relative to the dollar.
Currency Devaluation (from the Federal Reserve Bank of New York). This lesson was designed by a high school teacher to help students understand exchange rate fluctuations
Under a fixed exchange rate system, devaluation and revaluation are official changes in the value of a country's currency relative to other currencies.
Under a floating exchange rate system, market forces generate changes in the value of the currency, known as currency depreciation or appreciation.
The charter of the International Monetary Fund (IMF) directs policymakers to avoid "manipulating exchange rates...to gain an unfair competitive advantage over other
Since 1973, exchange rates for most industrialized countries have floated, or fluctuated, according to the supply of and demand for different currencies in international
markets. An increase in the value of a currency is known as appreciation, and a decrease as depreciation. Some countries and some groups of countries, however, continue
to use fixed exchange rates to help to achieve economic goals, such as price stability.
Under a fixed exchange rate system, only a decision by a country's government or monetary authority can alter the official value of the currency. Governments do,
occasionally, take such measures, often in response to unusual market pressures. Devaluation, the deliberate downward adjustment in the official exchange rate,
reduces the currency's value; in contrast, a revaluation is an upward change in the currency's value.
A key effect of devaluation is that it makes the domestic currency cheaper relative to other currencies. There are two implications of a devaluation.
First, devaluation makes the country's exports relatively less expensive for foreigners. Second, the devaluation makes foreign products relatively more expensive for
domestic consumers, thus discouraging imports. This may help to increase the country's exports and decrease imports, and may therefore help to reduce the current
Effects of Devaluation
A significant danger is that by increasing the price of imports and stimulating greater demand for domestic products, devaluation can aggravate inflation. If this
happens, the government may have to raise interest rates to control inflation, but at the cost of slower economic growth.
Another risk of devaluation is psychological. To the extent that devaluation is viewed as a sign of economic weakness, the creditworthiness of the nation may be
jeopardized. Thus, devaluation may dampen investor confidence in the country's economy and hurt the country's ability to secure foreign investment.
Another possible consequence is a round of successive devaluations. For instance, trading partners may become concerned that a devaluation might negatively affect their
own export industries. Neighboring countries might devalue their own currencies to offset the effects of their trading partner's devaluation.
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