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Module 43 Exchange Rate Policy KRUGMAN'S MACROECONOMICS for AP* Margaret Ray and David Anderson http://www.bloomb erg.com/markets/c urrencies/ What you will learn in this Module: USD EUR JPY GBP CHF CAD AUD HKD USD – 1.2570 0.0124 1.5588 1.0469 0.9760 1.0064 0.1289 EUR 0.7955 – 0.0099 1.2401 0.8331 0.7762 0.8005 0.1025 JPY 80.4300 101.1100 GBP 0.6414 0.8064 – 125.3800 84.1830 78.4930 80.9450 10.3630 0.0080 – 0.6714 0.6260 0.6456 • The difference between fixed exchange rates and floating exchange rates • Considerations that lead countries to choose different exchange rate regimes 0.0827 6/22/12 Exchange Rate Policy • Governments have more power to influence nominal exchange rates than other prices • Exchange rates are important to countries where exports and imports are a large fraction of GDP Exchange Rate Regimes •Exchange Rate Regime •Fixed Exchange Rate •Floating Exchange Rate •"Managed" & "Target Zone" How Can an Exchange Rate Be Held Fixed? •Exchange Market Intervention •Foreign Exchange Reserves •Foreign Exchange Controls The Exchange Rate Regime Dilemma •The Case for Fixed Exchange Rates • Facilitates trade by creating certainty about the exchange rate • Acts as a check on inflationary policies The Exchange Rate Regime Dilemma •The Case against Fixed Exchange Rates • Requires large foreign currency reserves • May divert monetary policy • Distorts incentives • Opportunity for corruption Figure 43.1 Exchange Market Intervention Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers