which of the following is true of fixed exchange rates course hero

What is a fixed exchange rate?

A fixed exchange rate is an exchange rate where the currency of one country is linked to the currency of another country or a commonly traded commodity so they can trade freely and smoothly with each other. The main issue with fixed exchange rates is that it limits a central bank’s ability to adjust interest rates to affect a country’s growth rate.

What are the limitations of monetary policy in a fixed exchange rate?

13. There are limits to the ability of monetary authorities to use sterilized intervention in the case of a surplus because: the central bank may be unwilling to increase its holdings of foreign currency. Monetary policy under a fixed exchange rate regime will be: constrained and relatively ineffective.

How can a fixed exchange rate attain internal and external balance?

According to the standard IS-LM-FE model, a country with a fixed exchange rate can attain both internal and external balance by using an appropriate mix of monetary and fiscal policies, without resorting to devaluation or revaluation. True Related questions QUESTION

When international capital flows are not very responsive to interest rates?

If international capital flows are not very responsive to interest rates, the initial impact of expansionary fiscal policy will: result in a deficit in the overall balance of payments. Which of the following is NOT true with fixed exchange rates and perfect capital mobility? Monetary policy is very powerful.

Is the LM curve the same as the FE curve?

monetary policy; LM curve effectively is the same as the FE curve.

Is LM FE steeper than FE?

Initially the economy is at point A, a triple intersection. Here, the FE curve is steeper than the LM curve.

Is the FE curve steeper than the LM curve?

Initially the economy is at point A, a triple intersection. Here, the FE curve is steeper than the LM curve.

What is the main issue with fixed exchange rates?

The main issue with fixed exchange rates is that it limits a central bank’s ability to adjust interest rates to affect a country’s growth rate.

Why set a fixed exchange rate?

Setting a fixed exchange rate with your trading partner will provide currency rate certainty to importers and exporters.

What is a CFI?

CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)®#N#Program Page - CMSA Enroll in CFI's CMSA® program and become a certified Capital Markets &Securities Analyst. Advance your career with our certification programs and courses.#N#certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful: 1 Fixed vs. Pegged Exchange Rates#N#Fixed vs. Pegged Exchange Rates Foreign currency exchange rates measure one currency's strength relative to another. The strength of a currency depends on a number of factors such as its inflation rate, prevailing interest rates in its home country, or the stability of the government, to name a few. 2 Currency Risk#N#Currency Risk Currency risk, or exchange rate risk, refers to the exposure faced by investors or companies that operate across different countries, in regard to unpredictable gains or losses due to changes in the value of one currency in relation to another currency. 3 Floating Exchange Rate#N#Floating Exchange Rate A floating exchange rate is an exchange rate system where a country’s currency price is determined by the foreign exchange market, depending 4 USD/CAD Currency Cross#N#USD/CAD Currency Cross The USD/CAD currency pair represents the quoted rate for exchanging US to CAD, or, how many Canadian dollars one receives per US dollar. For example, a USD/CAD rate of 1.25 means 1 US dollar is equivalent to 1.25 Canadian dollars. The USD/CAD exchange rate is affected by economic and political forces on both

What factors affect the strength of a currency?

The strength of a currency depends on a number of factors such as its inflation rate, prevailing interest rates in its home country, or the stability of the government, to name a few. Currency Risk. Currency Risk Currency risk, or exchange rate risk, refers to the exposure faced by investors or companies that operate across different countries, ...

Why is a fixed exchange rate important?

A fixed exchange rate helps to ensure the smooth flow of money from one country to another. It helps smaller and less developed countries to attract foreign investment. It also helps the smaller countries to avoid devaluation. Devaluation Devaluation is a downward adjustment to the country’s value of money relative to a foreign currency or standard.

What is the currency of the United States?

Nowadays, countries usually link their currencies to their trading partners like the United States dollar. United States Dollar (USD) The United States Dollar refers to the national currency of the U.S and is represented by the ISO code USD and is often abbreviated as US$. .

What happens to the currency in a floating exchange rate?

In a floating exchange rate, when the trade account deficit increases, the country needs to borrow more of the foreign currency. Hence, the price of the foreign currency goes up, which also pushes the price of foreign goods up in the domestic market. It reduces the demand for the foreign goods and brings down the trade deficit. However, this rebalancing is not possible in the case of a fixed exchange rate.