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Questions and Answers
What is the primary determinant of a currency's value in a managed float system?
What is the main goal of a managed float system?
What is the term for a currency whose value is not fixed but is influenced by government intervention?
What is the role of the central bank in a managed float system?
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What is the main difference between a managed float and a fixed exchange rate system?
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What is the main characteristic of a fixed or pegged exchange rate?
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What is the primary reason why countries choose dollarization?
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What is the term for a currency whose value is not fixed but for which governments will intervene extensively in the market to keep its value within a certain range?
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What is the result of a country adopting dollarization?
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What is the main difference between a fixed exchange rate and a floating exchange rate?
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What is the term for a currency that is used by a foreign country, either entirely or alongside its domestic currency?
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What is the main advantage of a fixed exchange rate?
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What is the main characteristic of a dirty or managed float?
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Study Notes
Exchange Rate Systems
- A fixed or pegged exchange rate is an exchange rate based on a government or central bank's promise to convert its currency into another currency at a fixed rate, with government intervention to maintain the rate.
Fixed or Pegged Exchange Rate
- Governments intervene in the foreign exchange market to maintain the fixed rate.
Floating Exchange Rate
- An exchange rate determined primarily by market forces, with no government intervention.
Dollarization
- A foreign country's use of the U.S. dollar as its currency, either entirely or alongside its domestic currency, to stabilize the economy, control inflation, and foster investor confidence.
- Can occur informally or formally, with the government officially adopting the U.S. dollar as the legal tender.
- However, it means relinquishing control over domestic monetary policy to the U.S. Federal Reserve.
Dirty or Managed Float
- A currency whose value is not fixed but is influenced by government intervention to keep it within a certain range.
- The currency's value is primarily determined by market forces, but the central bank or government occasionally intervenes to stabilize the currency or achieve economic objectives.
- Aims to combine the flexibility of floating rates with the stability of fixed rates.
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Description
This quiz covers topics related to exchange rates, including floating exchange rates, fixed or pegged exchange rates, and dollarization.
