Economics - ECON4 - AQA - Exchange Rates - Book notes - Chapter 18

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Floating ER – determined by D+S

Fixed ER – set & maintained by govt

Managed float – govt recognises market forces but intervenes periodically



ER = price of one currency in terms of another


Others currency for a variety of reasons:

- Purchase each other’s G+S

Invest in each other’s firms


Funds into each other’s banks when IR increases


Appreciation – floating ER value up

Depreciation – value down


Change in ER leads to change in relative P of X&M


Global trend towards ER determined by market, but govt will still intervene



Continuous and automatic as foreign exchange market changes rate automatically to reflect the purchasing power of one currency against another. If large B of P deficit find ER down and £X down

Reduced speculative pressure – if fixed speculators can sell currency, forcing govts to reduce value of currency. Floating – cannot be forced to depreciate ER. Speculators do not know how low govt will let it get

Reduce need 4 govts to hold large forex reserves as do not have to maintain ER level.



No guarantee that it will solve B of P problems – total spend depends on PeD

Domestic inflation – if ER


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