module exchange rate policy krugman's macroeconomics for ap* 43 margaret ray and david anderson
TRANSCRIPT
ModuleExchangeRate Policy
KRUGMAN'SMACROECONOMICS for AP*
43
Margaret Ray and David Anderson
What you will learnWhat you will learn
in thisin this ModuleModule::
• The difference between fixed exchange rates and floating exchange rates
• Considerations that lead countries to choose different exchange rate regimes
Exchange Rate PolicyExchange Rate Policy
• Governments have more power to influence nominal exchange rates than other prices
• Exchange rates are important to countries where exports and imports are a large fraction of GDP
Exchange Rate RegimesExchange Rate Regimes
•Exchange Rate Regime
•Fixed Exchange Rate
•Floating Exchange Rate
•"Managed" & "Target Zone"
How Can an Exchange Rate BeHow Can an Exchange Rate Be Held Fixed? Held Fixed?
•Exchange Market Intervention
•Foreign Exchange Reserves
•Foreign Exchange Controls
The Exchange Rate RegimeThe Exchange Rate Regime Dilemma Dilemma
•The Case for Fixed Exchange Rates
• Facilitates trade by creating certainty about the exchange rate
• Acts as a check on inflationary policies
The Exchange Rate RegimeThe Exchange Rate Regime Dilemma Dilemma
•The Case against Fixed Exchange Rates
• Requires large foreign currency reserves
• May divert monetary policy
• Distorts incentives
• Opportunity for corruption