Exchange rate systems

Question 1

Exchange rate

Answer 1

The rate at which one currency trades against another on the foreign exchange market

Question 2

4 types of ER

Answer 2

Freely floating (Canada)
Dirty floating (UK)
Adjustable peg (Qatar)
Rigidly fixed

Question 3

factors affecting exchange rates

Answer 3

Interest rates
Inflation
Speculation
Competitiveness 
Relative strength of other ER's

Question 4

3 advantages of floating ER’s

Answer 4

Automatically begins correcting balance of payments
Freeing internal policy
Lower foreign exchange reserves

Question 5

3 disadvantages of floating ER’s

Answer 5

Uncertainty
Speculation
Lack of investment

Question 6

3 advantages of fixed ER’s

Answer 6

Avoid currency fluctuations
Stability encourages investment
Keep inflation low

Question 7

3 disadvantages of fixed ER’s

Answer 7

Conflict with other objectives
Less flexibility
Current account imbalances harder to correct