AP Economics Mr. Bernstein Module 43: Exchange Rate Policy April 15, 2015.
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AP Economics Mr. Bernstein Module 43: Exchange Rate Policy April 15, 2015
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Transcript of AP Economics Mr. Bernstein Module 43: Exchange Rate Policy April 15, 2015.
AP Economics
Mr. Bernstein
Module 43: Exchange Rate Policy
April 15, 2015
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AP EconomicsMr. Bernstein
Exchange Rate PoliciesObjectives - 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
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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
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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
