BU288 Lecture Notes - Lecture 8: Foreign Exchange Market, Fixed Exchange-Rate System
Document Summary
Monetary policy autonomy high interest rates -> make the currency more worth ppp theory: If you import more than you export (make you import expensive and you export cheaper = balance) crisis recovery; cheaper currency = more export = out if recession. Fixed exchange rate system: the rate is fixed by the government or monetary authority and not determined by market forces, only a very small deviation from this fixed value is possible. No inflation: speculation, uncertainty, trade balance adjustments and economic recovery. Fixed exchange rate is the rate which is officially fixed in terms of gold or any other currency by the government. It does not change with change in demand and supply of foreign currency. As against it, flexible exchange rate is the rate which, like price of a commodity, is determined by forces of demand and supply in the foreign exchange market. It changes according to change in demand and supply of foreign currency.
