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IAI Actuarial Core Principles · Business Economics · Recent macroeconomic history

Which explanation best captures the 'Triffin dilemma' that contributed to the breakdown of the Bretton Woods system?

The Triffin dilemma says the US had to run deficits to supply dollar reserves for growing world trade, but those deficits weakened confidence that dollars could be exchanged for gold at the fixed price, undermining the system.

  1. ATo supply enough dollar reserves for world trade the US had to run deficits, which eroded confidence that the dollar could be converted into gold at a fixed priceCorrect
  2. BExcess gold production caused the price of gold to fall below the official price
  3. CThe IMF refused to lend to deficit countries, forcing them to float
  4. DCountries with surpluses were forced to devalue, causing a trade war
  5. Free capital controls prevented dollars from leaving the US

Explanation

Growth of world trade needed more reserve assets, mostly dollars, supplied via US payments deficits. As dollar liabilities exceeded US gold stocks, confidence in convertibility at $35 fell. The other options describe things not at the heart of Triffin's argument.

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