Exchange rate policy options

Question 1

Floating exchange?

Answer 1

value fluctuates based on market forces w/o direct government or bank intervention

Question 2

floating exchange adv + challenge

Answer 2

-auto adjustment mechanisms, absorbs shocks, encourages competitive devaluation\
-can lead to volatility, detrimental for trade + investment, can cause inflation

Question 3

Pegged exchange?

Answer 3

currency value tied to another major currency at a fixed rate

Question 4

Pegged exchange adv + challenge

Answer 4

-stability + predictability, helps control inflation, encourages foreign investment
-need large reserves of foreign currency, leads to misalignment if peg becomes over/undervalued, leading to trade imbalances

Question 5

Managed float?

Answer 5

hybrid approach where currency primarily floats, but banks intervene to stabilise or influence currency value

Question 6

managed float adv + challenge

Answer 6

-combines benefits of floating + peg systems, allows flexibility while providing stability
-can be inconsistent, requires strong monitoring + intervention capabilities, which can strain resources

Question 7

Currency board?

Answer 7

tighter version of pegged system, domestic currency is fully backed by foreign reserves at fixed exchange rate

Question 8

currency board adv + challenge

Answer 8

-strong monetary stability, reduces inflation, can restore investor confidence
-limited flexibility of monetary policy, challenged during economic crisis or if reserves deplete

Question 9

Crawling peg?

Answer 9

currency fluctuates within a band around a central rate that is periodically adjusted, usually in response to inflation + other economic indicators

Question 10

crawling peg adv + challenge

Answer 10

-gradual adjustment, inflation control, trade competitiveness
-management complexity, market speculation, not fully market driven