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Extract 2
Estonia (Case Study)…read more

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Exchange Rate
Fixed Exchange Rate:
A currency that is pegged against another currency
at a fixed price, and government intervention is
used to make sure it stays at that level.
Floating Exchange Rate:
Where a currency is determined solely by market
forces of demand and supply.
Managed(Semi) Floating Exchange Rate:
This is when the exchange rate is floating however if
it fluctuates or depreciates below/above a set level
then the government will intervene.…read more

Slide 3

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Fixed Exchange Rate
Provides certainty for investors and customers.
Firms buying raw materials will know exactly
how much they cost; investors will know exactly
how much return they will get on an
Firms can focus on getting domestic price down
thus making them more competitive.
It will impose financial discipline on the
government as they will have less use of
monetary levers.
Reduction in cost of hedging for firms.…read more

Slide 4

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Fixed Exchange Rate
To maintain the value of the fixed exchange
rate this may mean that other policies will
It could be that the exchange rate is not at the
long term equilibrium, therefore if set to high
could put firms a competitive disadvantage.
Foreign currency may need to be kept in order
to manage the ER these funds could pose an
opportunity cost.
Speculators could cause problems for a
government.…read more

Slide 5

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Floating Exchange Rate
Having a floating ER means the government no
longer need to have it as a policy.
Central Bank will no longer have to hold foreign
Monetary policy is more effective for managing AD
and inflation under a free and floating systems.
Less opportunity for currency speculation.
It should insure that they achieve balance of
payments equilibrium. For example if the demand
for exports falls the demand for the £ will fall and
the supply will rise. This will cause the £ in value
making exports cheaper and imports more
expensive, therefore correcting BofP disequilibrium.…read more

Slide 6

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Floating Exchange Rate
Regular currency changes can cause
uncertainty; it will be hard for a UK exporter
to determine price and maintain profit
margin. There will also be problems with
unpredictable costs of raw materials.
Some investors will try to reduce the
uncertainty by agreeing a price in advance
which will involve a cost.
Open to spectators.…read more

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