Chapter 16.3

Question 1

Fixed exchange rate system

Answer 1

When exchange rates are fixed by the central bank of each country at a particular level and are not permitted to change freely in response to to changes in currency supply and demand

Question 2

Ways the government can intervene to maintain fixed exchange rates

Answer 2

Use official reserves
Increase the interest rate
Borrow from abroad
Limit imports

Question 3

Devaluation

Answer 3

When the government sets a lower fixed rate for its currency

Question 4

Revaluation

Answer 4

When the government sets a higher fixed rate for its currency

Question 5

Managed exchange rates

Answer 5

A system that is in between floating exchange rate and fixed exchange rate systems

Question 6

Overvalued currency

Answer 6

A currency that has a value too high relative to its equilibrium free market value

Question 7

Undervalued currency

Answer 7

A currency that has a value too low relative to its equilibrium free market value

Question 8

Advantages and disadvantages of overvaluing a currency

Answer 8

Overvaluing currency would make imports cheaper, but would reduce exports and domestic firms would find it hard to compete with the import prices

Question 9

Advantages and disadvantages of undervaluing a currency

Answer 9

Exports become less expensive to foreigners and imports become more expensive so can increase AD. May cause cost push inflation