Th4.1: ^^ Fixed System Flashcards
What is a fixed system?
when the government sets their currency against another and that exchange rate does not change
Why might the country decide to devaluate its currency overnight?
to improve international competitiveness of it’s industry
What is one example of a fixed system?
the gold standard, where each major trading country made its currency convertible into gold at a fixed rate
How is a fixed exchange rate good?
it avoids currency fluctuations, which encourages trade and investment as firms/individuals know the true cost of the deal
reduces the cost associated with trade
may reduce inflation as there is increase in imports
However, if the currency is falling below the government’s set level, they will have to intervene by…
raising interest rates to increase the desire to move hot money into UK or buying sterling using gold or foreign currency reserves to increase demand - lead to other negative affects such as decrease growth
What are other problems with fixed systems?
easy for government to set exchange rate at wrong rate
less flexibility
difficult to respond to temporary shocks
