Th4.3: IS - Managed Exchange Rates

Question 1

What could the currency be fixed against?

Answer 1

a number of different exchange rates

Question 2

They could introduce high exchange rates for…

Answer 2

the import of essential products and lower exchange rates for others

Question 3

What would a high exchange rate for essential products mean?

Answer 3

that the price within the country is low, helping to reduce poverty if goods are consumer or encourages investment if goods are capital

Question 4

What will a lower exchange rate for other imports mean?

Answer 4

that the price of these goods within the country is higher, discouraging their import and encouraging consumers to buy from domestic producers

Question 5

What is the problem with these managed exchange rates?

Answer 5

they often fail to work in practice - black markets develop and corruption can become an issues if government officials buy currency at one rate and sell it for profit at another

Question 6

Alternatively, a government can manage…

Answer 6

a single exchange rate which will reduce volatility, but speculation may mean countries find it difficult to maintain this exchange rate over the years