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Exchange Rate:
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What does the exchange rate affect?
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ECON 202

Macroeconomics Final Exam: Chapter 18 Open Economy

QuestionAnswer
Exchange Rate: the price at which one currency trade for another
What does the exchange rate affect? relative rices of goods/services/assets in dif. countries, balance and capital flow
Appreciation of exchange rate money gains value, favored in exchange
Depreciation of exchange rate money loses value, not favored in exchange
Floating (flexible) exchange rate: value of currency determined by forces of Supply and Demand, gov. makes no attempt to fix it
Supply of Dollar in the Yen-Dollar Market US imports from Japan, US purchases of Japanese assets
Demand of Dollar in the Yen-Dollar Market Japan Imports from US, Japanese purchases of US assets
What factors affect exchange rate? inflation, economic outlook, political unrest, etc highly sensitive to monetary policy actions
How does exchange rate fluctuate with expansionary monetary policy at home country? lower interest rate at home makes home investment less attractive, demand for home currency decreases, home currency depreciates, export more/ import less/ help boost aggregate demand
How does exchange rate fluctuate with expansionary monetary policy at home country? higher interest rate at home makes home investment more attractive, demand for home currency increases, home currency appreciates, export less/ import more/ reduce aggregate demand
Fixed (pegged) exchange rate: value of currency set by official gov. policy, gov. intervention needed to maintain fixed rate
What are the 3 policy goals of Trilemma of International Macroeconomics? fixed exchange rate, independent monetary policy, free capital mobility
What is Trilemma of International Macroeconomics? Says that all 3 policy goals can not be met at the same time
Why would you choose and fixed exchange rate? What would you have to give up in exchange? eliminate volatility in exchange rate, but have to give up either independent monetary policy or free capital mobility
Why would you choose a floating exchange rate? What would you have to give up in exchange? Can have effective monetary policy, but have to deal with uncertainty in exchange rate
Created by: reganbobo15
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