Monetary Policy Flashcards
Types of exchange rate systems
Floating - currency value is set by the supply and demand relative to other countries
Fixed- where govt decides to fix value of currency in terms of another
Positives of floating exchange rate
Automatic stabilisation
No need to use reserves
Reduce deficit
No need for MP- certainty
Cons of floating exchange rate
Susceptible to external shocks
Increased risk and uncertainty-volatile
Speculation can cause appreciations - BOP
Pros of fixed exchange rate
Currency stability-FDI increase
Increased investment due to less uncertainty
Competitive pressure on firms - increase productivity
Cons of fixed exchange rate
Lose control of interest as needed to keep ER fixed
Less flexibility
Govt intervention uses high amount of resources - hard to maintain
Determination of exchange rate in floating ER
Would adjust until supply and demand came back into equilibrium
Determination of exchange rate in fixed system
Manipulated by buying or selling a currency to their preferred equilibrium
E.g increase in demand appreciating the currency increasing supply to meet this will bring it back to equilibrium
Monetary policy
Interest , money supply and exchange rate
Types of monetary
Expansionary - boost AD reduce unemployment and increase inflation
Contractionary- reduce AD , reduce inflation , reduce current account deficit
Monetary policy expansionary (E)
Demand pull inflation
CA deficit
Liquidity trap
Time lags
Influences on exchange rates
Interest rates
Inflation
Relative strength of other currencies
QE
Pros
Lower interest
Stimulate AD
Cons
Only benefits those with assets and stocks - income inequality
