Exchange Rate Systems Flashcards
Which exchange rate system is this graph an example of?
A Floating Exchange Rate
Which exchange rate system is this graph an example of?
A Fixed Exchange Rate
What is a floating exchange rate system?
When the value of an economy’s currency is determined by the forces of demand and supply in foreign exchange markets
When did Australia switch from a managed peg to a floating exchange rate?
December 1983
What determines demand for Australian dollars?
Financial Flows Into Australia
- Interest Rates
- Investment Opportunities
Expectations of Future Movements (Speculators)
Demand for Exports
- Changing Commodity Prices
- International Competitiveness of Domestic Exporters
- Changes in Global Economic Conditions
- Tastes and Preferences of Overseas Consumers
Government Intervention
What determines the supply of the Australian dollar?
Financial Flows
- Interest Rates
- Investment Opportunities
Expecations of Future Changes (Speculators)
Domestic Demand for Imports
- Level of Domestic Income
- Domestic Inflation
- Competitiveness of Domestic Firms
- Tastes & Preferences of Domestic Consumers
Government Intervention
What causes an appreciation of the A$?
An increase in demand or decrease in supply
What causes a depreciation of the A$?
A decrease in demand or increase in supply
What does ‘dirtying the float’ refer to?
When the RBA steps into the foreign exchange markets and buys and sells AUD
Why would the RBA dirty the float?
Dirtying the float is done to stabilsie the A$ - the RBA may do it if there is a rapid appreciation or depreciation of the currency
How can monetary policy decisions impact the exchange rate?
If the RBA wants to curb a rapid depreciation, it may increase the demand for the A$ by raising interest rates
This is known as indirect intervention and is very rare
What is a fixed exchange rate?
When the RBA officially sets the exchange rate, usually for a long period of time
What is the risk of a fixed exchange rate?
Fixed exchage rates must be maintained by buying or selling foreign currency
If the RBA exhausts its foreign reserves by propping up the exchange rate, it could lead to a complete collapse of trade in the currency
What is a managed flexible peg?
When the RBA ‘pegs’ the value of the A$ at 9am on each day and that price would operate throughout that day
Australia used this system between 1976-1983
