GPE Final Outline Gucci Versace Prada

GPE Final Outline Gucci Versace Prada - 1 GPE Final Outline...

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1 GPE Final Outline Chapter 10 Exchange rates and exchange rate systems o Exchange rate - is the price of one currency stated in terms of a second currency o can be given in one of two ways units of domestic currency per unit of foreign currency or vice versa o an increase in the exchange rate (for home currency): increase purchasing power o Gold standards are a form of fixed exchange rates. Under a pure gold standard nations keep gold as their international reserve 3 rules that countries must follow in order to maintain a gold exchange standard: o 1.) must fix the value of their currency unit in terms of gold o 2.) nations keep the supply of their domestic money fixed in some constant proportion to their supply of gold o 3.) nations must stand ready and willing to provide gold in exchange for their home country currency Dollarization - peg to the dollar, low fluctuation, if you peg to the wrong amount your screwed Fixed Exchange rate systems: o –determined by the market forces of supply and demand o –holds the value of the dollar constant through actions of the central government rates maintained by a country’s central bank What is a peg? o A peg is a country will sent their exchange rate equal to the dollar Crawling peg: o Same thing as peg, but they can adjust the rate occasionally ex.) Hong Kong, China, Singapore, Malaysia Single regional currency (ex. Euro) pros and cons Pros Cons Eliminates the need to convert each other money and there by reduces transaction costs Lose political symbolism and give up national currency Eliminates the fee paid to banks or currency brokers A country with its own currency can influence the rate of growth of a company in the short-run Simplifies accounting or book keeping and allows comparison prices across borders Eliminates price fluctuations caused by changes in the exchange rate Can help increase political trust Gives greater credibility to developing countries Chapter 12
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2 Financial crisis- usually involved a banking crisis and may also entail an exchange rate crisis o a financial crisis results in disintermediation and a slowdown in economic activity that may be severe o Three types of International Financial Crises Two Types of International Financial Crises Banking crisis Occurs when banking system becomes unable to perform its normal lending functions, and some or all of a nation’s banks are threatened with insolvency Intermediation o Primary role of banks – between savers and borrowers o Banks and financial institutions pool the savings of households and make them available to businesses that want to invest Disintermediation o When banks are unable to act as intermediaries between savers and investors – it is a serious problem with negative economic consequences Exchange rate crisis Caused by a sudden and unexpected collapse in the value of a nation’s currency Crisis entails a loss international reserves, followed by a
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