class20 - The Politics of Monetary Affairs Currency Systems...

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The Politics of Monetary Affairs Currency Systems over Time Different ways to regulate exchange rates: Gold Standard until the Great Depression Bretton Woods system: Dollar as reserve currency, fixed rates with devaluation 1971: Floating rates with management, bands, pegs, and free floats European Monetary Union (EMU) The Asian Financial Crisis: 1997 Why Do Exchange Rates Matter? Exchange rate: the relative prices of currencies--ex. £1 is worth $1.99 today Exchange rates affect the prices of imports and exports. Rising currency makes imports cheaper and exports more expensive Devaluation revives an economy by making exports cheaper and imports dearer. What Moves Exchange Rates? Under fixed rates, central banks must exchange currencies at those rates. Requires reserves/gold to buy and sell Under floating rates, market forces determine rates. Demand for currency from trade Inflation and its expectation reduces a currency. Central bank intervention and managed rates
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class20 - The Politics of Monetary Affairs Currency Systems...

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