Exchange rates pt3

Question 1

Fixed exchange rate advantages

Answer 1

Certainty-All economic agents can plan based a known given rate
Anti inflationary discipline-The government/central bank must manage the economy so that the value of the currency and competitiveness is maintained. They must keep a tight grip on inflation

Question 2

Fixed exchange rate disadvantages-Loss of monetary indepandence

Answer 2

If we use interest rates to stabilise exchange rates we may not be able to use it to achieve domestic objectives e.g. cutting interest rates promotes economic growth but may not be able to if it decreases the demand for pounds

Question 3

Fixed exchange rate disadvantages- Requirement for currency reserves

Answer 3

If we need to maintain currency reserves to have available so sell and support the exchange rate, there is an an OC as we cant use this cash elsewhere.

Question 4

Fixed exchange rate disadvantages-Problems of under or over valuation

Answer 4

-Misallocation of resources
-LR overvaluation is likely to lead to BOP crises as exports are unattractive to others
-Vulnerability to currency speculation-They might sell an overvalued currency and buy it back after devaluation to make a profit

Question 5

Euro

Answer 5

The euro is an example of a currency or monetary union. 19 european countries use it and currencies like the CFA are pegged/fixed to it.

Question 6

Currency union

Answer 6

An agreement between a group of countries to share a common currency and usually to have a single monetary and exchange rate policy.