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Chapter 4
Chapter 4

...  To achieve either of these objectives, the concept of an equilibrium exchange rate must be understood, as well as the factors that affect the equilibrium rate.  Before considering why an exchange rate changes, realize that an exchange rate at a given point in time represents the price of a curren ...
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Lecture 9
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... of the IS-LM and AD-AS models for an open economy. • An open economy can have several meanings: – Goods market: trades goods and services – Financial market: allow the flow of investment capital – Factor market: allows the free movement of companies and people ...
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PDF Download

... rency boards have survived to this day, for example in boards. Bermuda, Brunei, the Cayman Islands, Djibouti, the Falkland Islands, the Faroe Islands or Gibraltar. The present-day currency boards, however, are not a The second part of the twentieth century witnessed “pure” or “orthodox” type. A pure ...
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... risk losses on their huge holdings of U.S. securities, but they see such risks as a small price to maintain their export-led growth model. Figures on international financial flows speak loudly to the extent of this Asian support. According to the U.S. Treasury, capital inflows into the United States ...
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Fixed exchange-rate system

A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime where a currency's value is fixed against either the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold. There are benefits and risks to using a fixed exchange rate. A fixed exchange rate is usually used in order to stabilize the value of a currency by directly fixing its value in a predetermined ratio to a different, more stable or more internationally prevalent currency (or currencies), to which the value is pegged. In doing so, the exchange rate between the currency and its peg does not change based on market conditions, the way floating currencies will do. This makes trade and investments between the two currency areas easier and more predictable, and is especially useful for small economies in which external trade forms a large part of their GDP.A fixed exchange-rate system can also be used as a means to control the behavior of a currency, such as by limiting rates of inflation. However, in doing so, the pegged currency is then controlled by its reference value. As such, when the reference value rises or falls, it then follows that the value(s) of any currencies pegged to it will also rise and fall in relation to other currencies and commodities with which the pegged currency can be traded. In other words, a pegged currency is dependent on its reference value to dictate how its current worth is defined at any given time. In addition, according to the Mundell–Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.In a fixed exchange-rate system, a country’s central bank typically uses an open market mechanism and is committed at all times to buy and/or sell its currency at a fixed price in order to maintain its pegged ratio and, hence, the stable value of its currency in relation to the reference to which it is pegged. The central bank provides the assets and/or the foreign currency or currencies which are needed in order to finance any payments imbalances.In the 21st century, the currencies associated with large economies typically do not fix or peg exchange rates to other currencies. The last large economy to use a fixed exchange rate system was the People's Republic of China which, in July 2005, adopted a slightly more flexible exchange rate system called a managed exchange rate. The European Exchange Rate Mechanism is also used on a temporary basis to establish a final conversion rate against the Euro (€) from the local currencies of countries joining the Eurozone.
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