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AP Economics

AP Economics. Mr. Bernstein Module 43: Exchange Rate Policy April 23, 2014. AP Economics Mr. Bernstein. Exchange Rate Policies Objectives - Understand each of the following: The difference between fixed exchange rates and floating exchange rates

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AP Economics

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  1. AP Economics Mr. Bernstein Module 43: Exchange Rate Policy April 23, 2014

  2. AP EconomicsMr. Bernstein Exchange Rate Policies Objectives - Understand each of the following: • The difference between fixed exchange rates and floating exchange rates • Considerations that lead countries to choose different exchange rate regimes

  3. AP EconomicsMr. Bernstein Exchange Rate Policy • Governments have more power to influence nominal Exchange Rates than other prices • Exchange rates are important to countries where imports and exports are larger share of GDP • Affects relative attractiveness of goods and services • Exchange Rate regimes • Fixed rates are held constant…known as “pegs” or ‘target zones” • Floating rates are determined in market

  4. AP EconomicsMr. Bernstein How Can an Exchange Rates be Fixed? • Exchange Market Intervention • ie China sells Yuan/buys USD to keep Chinese products cheap to US consumers • Central Banks maintain foreign exchange reserves • Governments may limit ability to exchange currency; ie Korea limits foreigners’ ability to buy Won • Fixed rates create stability • Reduces uncertainty • Limits ability to use inflationary monetary policy • Can lead to costs similar to shortages or surpluses created by price floors and ceilings

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