The Global Economy

Question 1

advantages of a floating exchange rate

Answer 1

-reduces currency reserves
-BOP deficit leads to a fall in currency value which leads to an increase in exports (assuming theyre elastic)
-floating means gov doesnt have to use monetary policy

Question 2

disadvantages of floating exchange rate

Answer 2

-fluctuating makes planning difficult
-speculation can strengthen exchange rate (misleading uncompetitive)
-falls in exchange rate can lead to inflationary pressure
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Question 3

advantages of fixed exchange rate

Answer 3

-competitive pressure to keep costs down invest and increase productivity
-creates certainty which increases FDI

Question 4

disadvantages of fixed exchange rate

Answer 4

-difficult to maintain
-can lose control
-isnt sustainable, speculation can lead to people selling the currency.

Question 5

What are the different types of hybrid exchange rates

Answer 5

-managed floating (market forces but can intervene)
-semi fixed (fluctuate between bands)
-pegged (moved periodically)

Question 6

what is the result of a fall in exchange rate

Answer 6

-exports cheaper (more competititve)
-imports more expensive
-fall in unemployment through increase in job supply
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Question 7

what is a result of an increase in exchange rate

Answer 7

-inc in current account deficit
-unamployment rise
-fall in AD