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

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CHAPTER 18

EXCHANGE RATES

 

 

Floating ER – determined by D+S

Fixed ER – set & maintained by govt

Managed float – govt recognises market forces but intervenes periodically

 

FLOATING EXCHANGE RATES

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

Speculate

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

 

Advantages:

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.

 

Disadvantages:

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

Domestic inflation – if ER

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