PTP #14
From a UCLA PhD field exam, 1973
An Englishman holidaying on a small Mediterranean island paid all his expenses with checks on his English bank. The inhabitants were so impressed by his gentlemanly bearing that instead of cashing his checks, they used them thereafter as money. Who paid for the Englishman’s holiday?
Answer this question in terms of (a) fixed exchange rates and (b) floating exchange rates. Explain how different macroeconomic views of the world affect the answers.