Exchange rate systems

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  • Created by: meloakes
  • Created on: 31-03-15 15:08
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  • Exchange Rates
    • Freely Floating: the price of one currency is expressed in terms of another is determined by supply and demand
      • FOREX marekt: coming together of buyers and sellers
      • Long term capital transactions and Short term capital flows.
    • Fixed: one currency has a fixed value compared to another. Usually set by the government
      • Reduced uncertainty about the exchange rates
      • Reduced cost of trade
      • Discipline on domestic firms
    • Semi fixed: allows a currency to fluctuate within a permitted band of fluctuation
      • Adjustable peg systems: fixed in the short term but can move up and down in the long term
      • Managed floating systems: its allowed to float but the central bank will intervene
      • Crawling peg systems: exchange rate is fixed but there are small changes
      • Exchange rate band systems: floats freely within a permitted band of fluctuation
    • Purchasing Power Parity: the exchange rate that equalises the price of a basked of identical goods in two countries. it measures the true value of goods and services it will buy

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