Please enable JavaScript.
Coggle requires JavaScript to display documents.
:black_flag:Exchange Rate System:black_flag: (Fixed Exchange Rate (use…
:black_flag:
Exchange Rate System
:black_flag:
What is it?
the value of one currency expressed in terms of another currency
currencies are exchanged/traded on the foreign exchange market?
What is foreign exchange market?
the largest market in the world in terms of cash movement
includes the trading of foreign currencies between governments, central banks, private commercial banks, MNCs, etc
exchange rate regime?
the way a country manages its exchange rate
fixed exchange rate
floating exchange rate
managed exchange rate
Fixed Exchange Rate
an exchange rate regime where the value of a currency is fixed/pegged to the value of another currency, to the average value of a selection of currencies, or to the value of some other commodity
as the value of the variable that the currency is pegged to changes, then so does the value of the currency
central bank decides upon, then maintaining, the fixed value of the currency
value
raised= revaluation
fall= devaluation
use aggregate demand-supply diagram
if supply is higher than demand,
exchange rate will fall
without government intervention
to maintain exchange rate, government will need to
buy up
the excess supply of its own currency on the foreign exchange market by using the reserve of foreign currencies
shifting the demand curve
of its own currency to the right (increase)
to do this, government
previously amassed reserves of foreign currencies
the demand is higher than supply,
exchange rate will rise
without government intervention
maybe because more foreigners are travelling inside the country
to maintain exchange rate, government needs to
sell
its own currency on the foreign exchange market
to satisfy the excess demand
shifting the supply curve
to the right (increasing supply)
increase the country's reserve of foreign currencies
other step to maintain the exchange rate
by making it illegal to trade currency at any other rate
but it's hard to enforce unless the government has an effective monopoly over the conversion of the currency
dangers:
a black market may emerge in the currency, operating at a different exchange rate
Floating Exchange Rate
an exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and supply of, the currency on the foreign exchange market
value
rise= appreciation
fall= depreciation
no government intervention
use aggregate demand-supply diagram
factors that shift the demand and supply curves
increase demand of currrency
buy the country's exports of goods and services
because they are less expensive
because the said country's inflation rates is lower
travelling into the country
the country's invest prospect increase
other countries invest in the country
the country's interest rates increase
making it more attractive to save the money in its banks, or financial institutions
speculators think that the country's currency value will rise in the future, so they buy it now, so more people speculate will lead to increase in currency's demand
increase supply of currency
the country's consumers' demand decrease in demand
the country's inflation rates is higher, and g&s become relatively more expensive
the country's consumers' income increase
so their wants will increase, including the imports form abroad
a change in the taste of g&s, where consumers like imports more than domestic products
basically if other countries' currency demand increase
Managed Exchange Rate
in reality, there is no currency in the world that is allowed to be completely freely floating.
there will come times when the currency is subject to extreme fluctuations, and the government/central bank feel that they must intervene
if it is completely freely floating, this will cause uncertainty for business, which is not good in trade
most common systems
central bank will set an upper and lower exchange rate value, and then allow the currency to float freely, as long as it does not move out of the band
central banks do not make the upper and lower level values of public, for fear of speculation, but they do not exist