Target zone models Flashcards
Why is there no such thing as a truly fixed exchange rate
There is no such thing as a truly fixed exchange rate, because most currencies are allowed to float between certain bands in the real world.
What is a recent real world example of real world currency bands?
A recent real world example of real world currency bands is the EU currency zone in the European monetary system
What do target bands depend on?
Target bands depend on the economic condition and goals of the country.
Under the BW system, currencies were allowed to fluctuate by…
Under the Bretton Woods system, currencies were allowed to fluctuate by 1% above or below the specified rate
Under the BW system, currencies were allowed to fluctuate by…
Under the Bretton Woods system, currencies were allowed to fluctuate by 1% above or below the specified rate
Under the BW system, currencies were allowed to fluctuate by…
Under the Bretton Woods system, currencies were allowed to fluctuate by 1% above or below the specified rate
Under the BW system, currencies were allowed to fluctuate by…
Under the Bretton Woods system, currencies were allowed to fluctuate by 1% above or below the specified rate
What is a target zone?
A target zone is a specified numerical area within which a currency is allowed to fluctuate
What is an example of an expectation caused by a target zone?
An example of an expectation caused by a target zone is that when a currency exchange rate approaches an upper or lower band, there is an expectation that the monetary authority will step in
What happens when exchange rates hit the edge of a band?
When exchange rates hit the edge of a band, the currency becomes a fixed exchange rate
What happens when exchange rates hit the edge of a band?
When exchange rates hit the edge of a band, the currency becomes a fixed exchange rate
If agents are … … then this should affect the behaviour of the exchange rate within the band
If agents are forward thinking, then this should affect the behaviour of the exchange rate within the band
What does the monetary authority do to prevent the rate from hitting the top band?
To prevent the rate from hitting the top band, the monetary authority reduces the money supply to cause the exchange rate to appreciate
What does the monetary authority do to prevent the rate from hitting the bottom band?
To prevent the rate from hitting the bottom band, the monetary authority increases the money supply to cause the exchange rate to depreciate
As long as the exchange rate remains within the …, the money supply will remain …
As long as the rate remains within the band, the money supply will remain unchanged