exchange rates

Question 1

Floating exchange rate

what

Answer 1

a regime where the value of a currency is allowed to be determined only by demand and supply of it on the foreign market
appreciation/ depreciation

Question 2

factors to shift demand or supply curves of a currency (eg US from EU people)

Answer 2

Demand:
increase in demand of US goods/ services (higher EU inflation, incomes and tastes for US)
better US investment prospects
higher US interest rates (more likely to save there)
speculators predict increased US $ value
Vice versa for supply

Question 3

managed exchange rates

Answer 3

not many exclusively floating, business uncertainty or large fluctuations
currency which is allowed to float, with some intervention

Question 4

advantages of high exchange rates

Answer 4

downward pressure on inflation (price of finished goods and fop costs (imports) lower)
more imports (unit of currency can buy more of other)
improved domestic efficiency (imports and international competition)

Question 5

disadvantages of high exchange rate

Answer 5

damage to export industry (higher prices)

damage to domestic industries (imports, cannot compete lowered prices)

Question 6

advantages of low exchange rate

Answer 6

greater employment in exports and domestic (competitive internationally)

Question 7

disadvantages of low exchange rate

Answer 7

inflation (imported fops more expensive, eg raw materials)

Question 8

total evaluation of low vs high

Answer 8

high can fight inflation, but unemployment problems; low solves employment problems, but inflationary

Question 9

reasons for intervention

Answer 9

lower: increase employment, raise: lower inflation
fixed exchange rate
avoid large fluctuations, allow business confidence
improve current account deficit

Question 10

methods of intervention

Answer 10

using foreign currency reserves to buy or sell currencies (increase by buying own with reserves, lower by buying foreign)
changing interest rates (raise to raise, high attracts investment and buying own currency; vice versa, invest abroad)

Question 11

advantages of fixed exchange rate

Answer 11

reduced uncertainty for all economic agents
ensure sensible government inflation policies (have to keep inflation low to remain competitive)
reduce speculation in foreign exchanges (not always case, attempts made to destabilize to gain by foreigners)

Question 12

disadvantages of fixed

Answer 12

domestic macro goal of low unemployment may be sacrificed (because of changes to interest rates to raise demand for currency, but deflationary)
must maintain high levels of foreign reserves to be able to defend itself
complex levels (keep competitive)
international disagreement (unfair trade advantages)

Question 13

advantages of floating

Answer 13

interest rates are free to be used for domestic problems (eg inflation)
in theory self adjustment to balance current account (if deficit, demand should be low since exports are low and supply high)
not necessary for high foreign reserves

Question 14

disadvantages of floating

Answer 14

uncertainty in international markets (future costs and revenue)
not necessarily self adjusting, influenced by government intervention and major events
worsen inflation (high inflation bad exports, rights and imports expensive)