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Questions and Answers
What action does the Barbadian government take to maintain a fixed exchange rate when there is excess demand?
What action does the Barbadian government take to maintain a fixed exchange rate when there is excess demand?
Why might a government choose to make it illegal to trade currency at any other rate?
Why might a government choose to make it illegal to trade currency at any other rate?
What is a significant danger of a government controlling currency exchange rates?
What is a significant danger of a government controlling currency exchange rates?
One benefit of fixed exchange rates is that it reduces uncertainty for businesses. How does this help them?
One benefit of fixed exchange rates is that it reduces uncertainty for businesses. How does this help them?
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What effect can inflation have on the demand for exports and imports when exchange rates are fixed?
What effect can inflation have on the demand for exports and imports when exchange rates are fixed?
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What is one reason why speculation might still occur in fixed exchange rate systems?
What is one reason why speculation might still occur in fixed exchange rate systems?
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Which action is a government likely to take if it faces a risk of its fixed exchange rate falling?
Which action is a government likely to take if it faces a risk of its fixed exchange rate falling?
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Why does a government need to maintain high levels of foreign reserves for a fixed exchange rate?
Why does a government need to maintain high levels of foreign reserves for a fixed exchange rate?
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What is an exchange rate?
What is an exchange rate?
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What characterizes a fixed exchange rate system?
What characterizes a fixed exchange rate system?
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What does currency appreciation indicate?
What does currency appreciation indicate?
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Which of the following statements regarding depreciation and appreciation is true?
Which of the following statements regarding depreciation and appreciation is true?
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Which factor is likely to lead to a decrease in demand for a currency?
Which factor is likely to lead to a decrease in demand for a currency?
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What is one advantage of a floating exchange rate system?
What is one advantage of a floating exchange rate system?
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How do businesses benefit from a strong currency?
How do businesses benefit from a strong currency?
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What distinguishes a managed exchange rate system from a fixed rate system?
What distinguishes a managed exchange rate system from a fixed rate system?
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What effect do floating exchange rates have on foreign currency reserves?
What effect do floating exchange rates have on foreign currency reserves?
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How does a floating exchange rate theoretically self-adjust?
How does a floating exchange rate theoretically self-adjust?
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What is one disadvantage of floating exchange rates for businesses?
What is one disadvantage of floating exchange rates for businesses?
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What external factors can affect floating exchange rates?
What external factors can affect floating exchange rates?
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What assumption underlies the theory of self-adjusting floating exchange rates?
What assumption underlies the theory of self-adjusting floating exchange rates?
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What is a consequence of increased speculation on the value of a currency under a floating exchange rate?
What is a consequence of increased speculation on the value of a currency under a floating exchange rate?
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In what way can increasing interest rates in one region impact currency exchange rates?
In what way can increasing interest rates in one region impact currency exchange rates?
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Why might floating exchange rates lead to decreased international investment?
Why might floating exchange rates lead to decreased international investment?
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Study Notes
Chapter 26: Exchange Rates
- This chapter examines the winners and losers of global economic integration, focusing on exchange rates.
- Key objectives include defining, explaining, and providing examples of various exchange rate systems (fixed, floating, managed).
- Distinguishing between devaluation and revaluation, and depreciation and appreciation, is also crucial.
- Calculating exchange rates and understanding factors affecting currency demand and supply are essential skills.
- Different exchange rate systems, including managed systems, and their advantages and disadvantages have also been examined. The way that a country manages its exchange rate is known as its exchange rate regime (system). There are three main types: fixed exchange rate system, floating exchange rate system and managed exchange rate system.
- A basic understanding of the foreign exchange market, its participants, and the limitations on individuals affecting exchange rates, is provided.
- The roles of governments, central banks, commercial banks, and multinational corporations (MNCs) are discussed.
- The international foreign exchange market (Forex market), its volume, and trading centers are detailed.
- Calculating exchange rates and understanding how they are used to compare the value of different currencies are also demonstrated.
- Understanding who benefits most from strong or weak currencies (consumers versus manufacturers) and the role of a nation’s policies related to exchange rates are presented.
- Examples of countries that use the US dollar or the Euro for currency exchange (or pegs) are given.
Exchange Rate Systems
- Fixed exchange rate system: the value of a currency is fixed, or pegged, to the value of another currency, to the average value of a selection of currencies, or to the value of some other commodity such as gold.
- Floating exchange rate system: the value of a currency is determined by the demand and supply of the currency.
- Managed exchange rate system: currency is allowed to float, but with some element of governmental interference.
- Factors causing changes in exchange rate include travel, imports, exports, and government intervention (buying/selling currency reserves).
Currency Pegging Examples
- Specific examples of countries and their currency pegs (e.g., Bahrain to USD, Bulgaria to EUR, etc.) are presented in a table format.
Exchange Rate Diagrams
- Basic supply and demand diagrams illustrate the market mechanisms determining exchange rates. Diagrams showcasing how supply and demand affect exchange rates are presented.
- Examples including, but not limited to, the market for US dollars in Euros and the market for Euros in US dollars are included.
Fixed Exchange Rate System
- Definition: a fixed exchange rate is an exchange regime where the value of a currency is fixed or pegged to the value of another currency or commodity.
- Key terms: revaluation (raised value), devaluation (lowered value).
- Government intervention: governments intervene in the foreign exchange market to maintain a fixed exchange rate.
- Examples: The quantity of Barbadian dollars available in the foreign exchange market, fixed exchange rate in Barbados. (Supply / demand curves are provided).
Floating Exchange Rate System
- Definition: a floating exchange rate is an exchange rate regime where the value of a currency is determined solely by demand and supply on the foreign exchange market.
- No government intervention: no government intervention to influence the value of the currency.
- Appreciation/depreciation: value of currency rises = appreciation, value of currency falls = depreciation.
- Factors affecting demand/supply: various factors affect demand and supply of currencies (e.g., trade, investment, speculation).
Managed Exchange Rate System
- Definition: in managed exchange rate systems, the currency is allowed to float, but there's government intervention.
- Central bank intervention: Central banks intervene to manage exchange rates when they approach upper or lower limits.
Strong/Weak Exchange Rates
- Advantages and disadvantages of strong (high value) and weak (low value) exchange rates for exports and imports are detailed, as well as the impact on employment and inflation.
Calculating Exchange Rates
- Demonstrates how to calculate exchange rates and their impact on the price of goods.
Video Activity
- A comparison of fixed vs. floating exchange rates is presented, with questions relating to the rationale behind government intervention and the trade-offs associated with various exchange rate policies.
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Description
Explore the measures taken by the Barbadian government to maintain a fixed exchange rate amidst excess demand. This quiz also examines the implications of making alternative currency trading illegal and its effects on the economy.