what does it mean if a country has a "fixed" exchange rate? (course hero)

What is a fixed exchange rate?

Oct 20, 2015 · Question 9 5 out of 5 points What does it mean if a country has a “fixed” exchange rate? Answer Selected Answer: The value of the country’s currency is tied to the value of another currency. Correct Answer: The value of the country’s currency is …

How can a government maintain a fixed exchange rate system?

May 05, 2016 · Question 6 5 out of 5 points What does it mean if a country has a “fixed” exchange rate? Selected Answer: the value of the country’s currency is tied to …

Do exchange rates have to be fixed to prevent currency appreciation?

in the foreign exchange market to achieve a particular fixed exchange rate. Pegged Under a pegged regime (sometimes referred to as a ‘fixed regime’), the central bank ties the value of its currency to another nation's currency. The exchange rate is controlled by intervening in the

When a country decreases the official value of its currency?

Jan 01, 2015 · Fixed exchange rate has to do with a country or economy under which the government or central bank fixes the official exchange rate to another country’s currency or the price of valued goods like gold in order to ensure a free flow of transaction between it and the other country(s). The purpose of a fixed exchange rate system is to maintain a country’s …

What are the advantages of fixed exchange rates?

Advantages of fixed exchange rates 1 The idea of fixed exchange rates is that they reduce uncertainty over fluctuations in the currency; this gives greater confidence for firms to invest (especially exporters). 2 However, critics argue that fixed exchange rates can be difficult to maintain – it may require high-interest rates and deflating the economy – just to keep the currency at its target. Also, currencies can be forced out of the fixed exchange rate – undermining its supposed benefits.

What happens if the rate is too high?

It is difficult to know the right rate to join at. If the rate is too high, it will make exports uncompetitive. If it is too low, it could cause inflation. In the late 1980s, the UK chancellor, Nigel Lawson tried to shadow the DM and keep Sterling low; this led to a rise in inflation.

How does devaluation affect inflation?

Devaluation of a currency can cause inflation because AD increases, import prices increase and firms have less incentive to cut costs. AD increases (higher demand for exports), import prices increase, and firms have less incentive to cut costs. Import prices increase. Firms have less incentive to cut costs.

What is real effective exchange rate?

Real variables take account of the effects of price changes whereas nominal variables do not. The real effective exchange rate is a nominal effective exchange rate (such as the TWI described above) multiplied by the ratio of Australian prices to prices of our trading partners. Since trade competitiveness is ultimately determined by changes in the price of Australian goods and services relative to foreign goods and services, the real TWI can be a better measure of trade competitiveness than the nominal TWI. It is often used in analytical work, whereas the other types of exchange rates are more visible in our daily lives.

Why are exchange rates important?

They also affect how the Reserve Bank conducts monetary policy. This article outlines how exchange rates are measured, the different types of exchange rate regimes, the factors that influence the exchange rate and how changes in the exchange rate affect the economy.

What is bilateral exchange rate?

bilateral exchange rate refers to the value of one currency relative to another. It is the most commonly referenced type of exchange rate. Most bilateral exchange rates are quoted against the US dollar (USD), as it is the most traded currency globally. Looking at the Australian dollar (AUD), the AUD/USD exchange rate gives you the amount of US dollars that you will receive for each Australian dollar that you convert (or sell). For example, an AUD/USD exchange rate of 0.75 means that you will get US75 cents for every 1 AUD.

How does the central bank control the exchange rate?

The exchange rate is controlled by intervening in the foreign exchange market (buying and selling currency) to minimise fluctuations and to keep the currency close to its target (or within a narrow target band). Usually the central bank from the economy maintaining the peg will also be forced to set interest rates at a similar level to those in the economy to which it is pegged to prevent investors shifting a large amount of funds between economies (these are known as capital flows) and pushing the exchange rate away from the peg.

How does the Australian dollar affect the value of the Australian dollar?

The Australian dollar is bought and sold when capital flows between Australia and other countries. These transactions therefore influence the value of the currency. Inward investment (foreigners purchasing Australian assets) creates demand for Australian dollars and puts upward pressure on the currency's value, while outward investment (Australians purchasing foreign assets) increases the supply of Australian dollars in foreign exchange markets and places downward pressure on the currency's value.

How does the Australian dollar affect the exchange rate?

Exchange rate movements are also influenced by speculation, news and events. If speculators believe that the Australian dollar will depreciate in the future, they may sell Australian dollars and buy foreign currencies to make an expected profit. This would increase the supply of Australian dollars and cause its value to fall. Speculation can result in substantial short-term volatility in the exchange rate.

What is the gold standard in Australia?

Prior to the early 1930s, Australia operated under the gold standard. The gold standard meant that currency was redeemable for gold at a fixed price. The gold standard was abandoned in the midst of the Great Depression.

What is a fixed exchange rate?

Fixed Exchange Rate: A fixed exchange rate is such that is fixed and maintained by the government of a country or by its financial institution like the central bank. This is also regarded as a pegged rate. No fluctuations are allowed in the rate and this is usually fixed along side the US dollar. Others include:

Why are fixed rates important?

Fixed rates may provide a more stable environment for international investment and growth through avoidance of uncertainty and associated costs; discipline – incentive to avoid excess demand, inflation, and B of P difficulties; less destabilising speculation. A very simple theory about this is the consideration of the sale of gold. If the price of gold is pegged at the same price for every country, it will ensure that the demand and supply curve of the commodity is fixed and any change in demand will lead to swift change in supply. No matter the quantity demanded or supplied, the price remains as agreed by the countries involved as the exchange rate is pegged. The diagram below makes it more explicit.

What are the factors that influence the exchange rate?

There exist many factors that influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country. This is also known as rate of exchange or foreign exchange rate or currency exchange rate’.

Why is reduced risk important in international trade?

Reduced risk in international trade: This system helps the international market to be confident of the fact that during the course of the trade, there is an assurance of stable price for the commodities.

Is balance of payments adjustment automatic?

Balance of payments adjustment is not automatic: With a fixed rate, the problem of disequilibrium occurs and would have to be settled through a reduction in the level of aggregate demand. As the level of demand falls consumers take less import, price level falls making you more competitive.

What is floating exchange rate?

A floating exchange rate is when a country’s currency is determined by the supply and demand of other stronger currencies. Floating exchange rate is speculated and determined on the open market where supply and demand factors play a huge role.

What is the currency of Jordan?

Jordan’s currency is the Jordanian Dinar and it is abbreviated to JOD. It has been the official currency since 1950 when it replaced the Palestine pound. The currency is now pegged to the US dollar with a fixed exchange rate of 0.7090 per US dollar. Jordan had witnessed noticeable stability in its currency rate which is reflected on ...

How many countries use Euro?

Euro is the official currency of 19 countries in the European Union which includes a total of 27 countries. It is called the euro zone and it includes France, Germany, Austria, Belgium and others. Euro is considered the second most traded currency after the US dollar in the foreign exchange market. The currency’s exchange rate is free-floating ...

What is high volatility?

High volatility leads to exchange rate risks, hence countries with a floating rate system allocate scarce resources to predict exchange rate changes and manage the risks as much as possible. There is a chance that the internal economic status of the country will worsen as unemployment rates, inflation, ...

What is managed float?

Also known as the dirty float, a managed float is a currency exchange regime that allows regular intervention by the government or the central bank in the foreign exchange market to change the direction of the currency to meet specific needs. For example, balancing the economy, reducing risks of recession, improving currency’s position, etc.

What is the central bank's policy?

Central bank policy decisions that are irreversible. The central bank finances itself from the earnings on its assets and turns the balance over to the government. The central bank policymakers are appointed for 14-year terms. Suppose in an election year, the economy declined into a depression.

Which treaty established the European Central Bank?

Terms in this set (45) The Maastricht Treaty, which established the European Central Bank, states that the governments of the countries in the European Monetary Union must not seek to influence the members of the central bank's decision-making bodies.

What is the Maastricht Treaty?

Gravity. The Maastricht Treaty, which established the European Central Bank, states that the governments of the countries in the European Monetary Union must not seek to influence the members of the central bank's decision-making bodies.