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Exchange Rate - Coggle Diagram
Exchange Rate
Fixed
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When they wanttheir currency to appreciate,they buy it on forex markets using their foreign
reserves,thus increasing its demand
When they wanttheir currency to depreciate,they sell it on forex markets,thus increasing its
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Often the peg is not at parity e.g. Hong Kong has pegged its currency to the US$ at a rate of HK$ 7.75 =
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Managed
The exchange rate is allowed to fluctuate within a specified band around a desired valuation. Ifit goes
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When they wanttheir currency to appreciate to back within the band,they buy it on forex markets
using their foreign reserves,thus increasing its demand
When they wanttheir currency to depreciate back into the band,they sell it on forex markets,thus
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Floating
When Europeans visitthe USA,they demand US$ and supply Euros
The increased demand for the US$ shifts the demand curve to the right which results in the value ofthe $ appreciating from P → P in the USD market and a new market equilibrium forms at P Q
The increased supply of the Euro shifts the supply curve to the right which results in the value of the Euro depreciating from P → P and a new market equilibrium forms at P Q
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