Exchange rates Flashcards
1
Q
What is a fixed exchange rate
A
Tying currency to another stronger such as the dollar by using reserves
2
Q
What is the J curve, describe the axis and graph
A
Graph illustrating the effects of a currency devaluation on the current account
- Flatline deficit then a further dip before increasing
3
Q
What is the Marshall Lerner condition
A
States that devaluation will only positively benefit the current account if the elasticity of demand for imports and exports is negative and above 1
4
Q
What is a floating exchange rate
A
Exchange rate is determined purely by the market
5
Q
What is a managed float
A
A floating exchange rate with possible intervention to stabilise the currency
6
Q
What are the pros of a floating exchange rate
A
- Greater monetary policy freedom (less care for rate)
- Less currency reserves needed
- Shock absorption
7
Q
What are the cons of a floating exchange rate
A
- More volatility (business confidence)
- May counteract other policies (monetary)
- may lead to trade imbalances
- Inflation
- Loss of a policy tool
8
Q
What are the pros of a fixed rate
A
- Price stability (business confidence)
- Attracts foreign investment
9
Q
What are the cons of a fixed rate
A
- Lack of flexibility in monetary policy
- Balance of payments harder to control
- Heavy dependence on reserves
