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This module delves into the intricacies of exchange rate policies, highlighting the distinctions between fixed and floating exchange rates. Students will explore government intervention in currency valuation and the implications of different exchange rate regimes on international trade and economic stability. Key considerations include how fixed exchange rates (pegs) create stability and reduce uncertainty, while floating rates are determined by market forces. The module examines the power of governments to influence exchange rates and the considerations driving a country's choice of exchange rate regime.
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AP Economics Mr. Bernstein Module 43: Exchange Rate Policy April 23, 2014
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
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
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
