UNIT III EXAM - UNIT III EXAM 1. Flexible Exchange Rate...

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UNIT III EXAM 1. Flexible Exchange Rate System = The system whereby exchange rates are determined by the forces of supply and demand for a currency Fixed Exchange Rate System = the system whereby a nations currency is set at a fixed rate relative to all other currencies, and central banks intervene in the foreign exchange market to maintain the fixed rate Managed Float System = A managed flexible exchange rate system under which nations now and then intervene to adjust their federal reserve holding to moderate major swings in exchange rates Flexibles Rates: - Result in PPP which helps adjust relative price levels o i.e. US price level 10%, dollar depreciates by 10% - can fluctuate as a result of supply and demand - Bad because you never know what the exchange rate will be Fixed Exchange Rates: - Enable there to be a surplus/shortage which causes overvaluation and undervaluation of money - Overvalued dollar makes the US goods more expensive which can C and EX 2. Purchasing Power Parity = states that exchange rates between any two currencies will adjust to reflect changes in relative price levels of the two countries. - Based on the idea of inflation: - No matter how much the exchange rate changes, you will continue to have the same purchasing power because inflation causes for the exchange rates to be altered accordingly.
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US = 62 % 1 Euro = $1.00 EUROPE = 50% .62 - .5 = .12 $1.00 x 112% = $1.12 4. IMF = An international organization created to oversee the international monetary system. The IMF does not control the world’s money supply, but it does holy currency reserves for member nations and make loans to central banks - Loan money to countries with problems in balance of payments of deficit problems - More focused on currency problems World Bank = Loan money to LDC w/need for long term projects (infrastructure purposes) i.e. dams, hospitals, ports - Get money from the more developed countries BOTH make loans on terms of conditionality which causes problems when countries can’t fulfill the conditions/ find the conditions unnecessary. -
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This note was uploaded on 04/16/2008 for the course EB 011 taught by Professor Noell during the Spring '08 term at Westmont.

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UNIT III EXAM - UNIT III EXAM 1. Flexible Exchange Rate...

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