Economics and Exchange Rates: Review Questions and Problems

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1.a) What are the alleged advantages of a fixed over a flexible exchange rate system? How do advocates of flexible exchange rates respond? Fixed rates provide greater certainty for exporters and importers and under normally circumstances there is less speculative activity, although this depends on whether the dealers in the foreign exchange markets regard a given fixed exchange rate as appropriate and credible. Economists generally think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates because floating rates are responsive to the foreign exchange market. (b) What overall conclusion can be reached on whether flexible or fixed exchange rates are preferred? Fixed exchange rates deprive governments of the use of an independent domestic monetary policy to achieve internal stability. This is undoubtedly among one of the top reasons that the floating system has become more popular throughout the world today. 6. What is meant by a crawling peg system? How can such a system overcome the disadvantage of an adjustable peg system? The crawling peg system allows for depreciation or appreciation in an exchange rate to occur over time, as opposed to an adjustable peg system. This can allow a country more stability to move their currency's value to the market price over time. Chapter 16: Review Questions and Problems 1, 2, 4, & 6 1. Explain: (a) How economic conditions today differ from those prevailing under the gold standard period.
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