Download AP Economics Mr. Bernstein Exchange Rate Policy

AP Economics
Mr. Bernstein
Module 43:
Exchange Rate Policy
March 2017
AP Economics
Mr. Bernstein
Exchange Rate Policies
Objectives - Understand each of the following:
• The difference between fixed exchange rates and floating
exchange rates
• Considerations that lead countries to choose different
exchange rate regimes
2
AP Economics
Mr. Bernstein
Exchange Rate Policy
• Governments have more power to influence nominal
Exchange Rates than other prices
• Exchange rates are important to countries where
imports and exports are larger share of GDP
• Affects relative attractiveness of goods and services
• Exchange Rate regimes
• Fixed rates are held constant…known as “pegs” or ‘target
zones”
• Floating rates are determined in market
3
AP Economics
Mr. Bernstein
How Can an Exchange Rates be Fixed?
• Exchange Market Intervention
• ie China sells Yuan/buys USD to keep Chinese products
cheap to US consumers
• Central Banks maintain foreign exchange reserves
• Governments may limit ability to exchange currency; ie
Korea limits foreigners’ ability to buy Won
• Fixed rates create stability
• Reduces uncertainty
• Limits ability to use inflationary monetary policy
• Can lead to costs similar to shortages or surpluses created
by price floors and ceilings
4