Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 35, Problem 6DQ
To determine
The reason for the establishment of the fixed exchange rate system.
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Students have asked these similar questions
In chapter 11, "International Economics," of Naked Economics, Charles Wheelan explains alternative exchange rates systems.
To which of the below systems does he refer when he describes thus:
Countries pledge to maintain the exchange rate for their currency at some predetermined rate of exchange with a country or a group of other countries.
A) Fixed exchange rates
B) Floating exchange rates
C) The gold standard
D)The value of a nation's currency is matched to the currency of another economy, as the Argentine currency was set equal to the U.S. dollar.
While floating exchange rates have several advantages, they can also lead to increased volatility in currency values. How do central banks strike a balance between allowing market forces to determine exchange rates and intervening to prevent excessive currency fluctuations that could negatively impact their economies?
What are the short-run and long-run determinants of exchange rates, under the condition of free markets?
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- Outline the arguments for and against a system of fixed foreign exchange rates.arrow_forwardDenmark pegs its currency to the euro. Even though Denmark opted not to join the single currency in 1999, it has pegged its currency very tightly to the euro ever since and keeps the value of the krone within a +/−2 percent band. How do you explain that Denmark seems to be willing to bear the cost of a tight peg to the euro without fully enjoying the benefits of membership to the single currency?arrow_forwardSince 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, currencies that are predominantly market-driven are considered to be what type of regime?arrow_forward
- If the European Central Bank starts to raise its policy interest rate before the Fed starts to raise the federal funds rate target, what do you predict will happen to the dollar/euro exchange rate? Illustrate your answer with an appropriate example.arrow_forwardBetween 1879 and 1914, the world's major nations adhered to the gold standard. Under the gold standard, a country maintained a fixed relationship between its stock of gold and its money supply. Suppose that Great Britain defined a British pound as 90 grains of gold, and the United States defined $1 as 150 grains of gold. Under the gold standard, a British pound would have been worth $0.60 Suppose the fixed exchange rate is $0.60 per pound. Suppose that an economic expansion in the United States leads to an increase in imports from Great Britain. On the following graph, shift the relevant curve or curves to illustrate the described changes. Then use the black points (cross symbol) to indicate the imbalance. 1.2 0 Supply for pounds 4 Demand for pounds 12 QUANTITY OF POUNDS (Millions) U.S. dollars. 16 Demand for pounds Supply for pounds + The Imbalance (?arrow_forwardUse the Mundell-Fleming model to graphically illustrate and predict what would happen to GDP, the exchange rate, and the money supply under fixed exchange rates when the stock market boomsarrow_forward
- The autonomous region of Catalonia has recently declared independence from Spain, and is looking for an exchange rate policy that would best fit their needs. The Catalans’ main goal is to stabilise the price level in the long-run, but constantly experience fluctuations in the price of foreign goods imported from Spain and other European countries. Would it be better for the Catalans to fix the exchange rate against the Euro, or to adopt a floating exchange rate? Justify your answer briefly.arrow_forwardIn 1961, Charles de Gaulle decided he did not want the French franc to be considered as a second-rate currency, so he chopped two zeros off the value of the franc, which meant the exchange rate was approximately FF5/$ instead of FF500/$ (he also ordered that the $ key on IBM punchcard machines be replaced by the FF symbol). This had no immediate impact on any domestic or international transactions, but was supposed to convince the French people to put inflation behind them and keep their currency in line with the Dmark and the British pound. Whether or not this change in currency values made any difference, the relative inflation rate did slow down and the value of the FF did rise relative to the dollar over the next two decades. At the same time, the current account balance improved slightly. Based on these factors, explain what happened to the growth rate, show how the NX and NFI curves must have shifted, and describe the underlying economic developments.arrow_forwardReducing Economic Exposure Colorado, Inc., is a U.S.-based MNC that obtains 10 percent of its supplies from European manufacturers. Sixty percent of its revenues are due to exports to Europe, where its product is invoiced in euros. Explain how Colorado can attempt to reduce its economic exposure to exchange rate fluctuations in the euro.arrow_forward
- If the domestic prices for traded goods rose 40 percent over 10 years in China and 25 percent over those same 10 years in the United States, what would happen to a freely floating Chinese yuan/U.S. dollar exchange rate? Why?arrow_forwardWhat are the goals of monetary policy? What are the monetary policy targets? Which target is currently utilized by the Fed? Why doesn’t the Fed use the other one? If American demand for purchases of British goods has decreased, how would you expect the equilibrium exchange rate in the market for dollars to respond?arrow_forwardCritically examine the FIVE types of foreign exchange market participants and identify their motives for buying or selling foreign exchangearrow_forward
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