Global Finance (4): Exchange Rate Systems

Question 1

What are the main characteristics of the free floating exchange rate system?

Answer 1

1. Value set by market forces.
2. Can appreciate or depreciate.
3. No gov’t intervention.
4. No targets for exchange rate.

Question 2

What are the main characteristics of a managed floating system?

Answer 2

1. Value set from day-to-day market forces.
2. Central banks may intervene support or weaken currency.
3. Is target of monetary policy with higher exchange rate.

Question 3

What countries use the managed floating system?

Answer 3

Singapore, China

Question 4

How is China able to control their currency? (3 ways)

Answer 4

1. Limit inflow/outflow of money.
2. Strict foreign investment quotas.
3. Huge reserves to intervene if need be.

Question 5

What are the main characteristics of a fixed exchange rate system?

Answer 5

1. Value set by central banks that peg to a currency.
2. Central bank must have enough foreign reserves.
3. Peg rate becomes exchange rate
4. Government devalue and revalue exchange rate with IMF.

Question 6

What are the main characteristics of a currency board system?

Answer 6

1. Currency backed by foreign reserve currency
2. Fixed exchange rate
3. Must have foreign currency = domestic