Final report - Price level Quantity of currency S Value of currency S D2[Pick D|D1 the date 1 Quantity 1 Exchange rate 4 1/4 Figure 2 T ABLE OF

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Price level Quantity of currency Value of currency S D 1 1 4 1/4 Figure 2 S D 2 D 1 Quantity Exchange rate [ | [Pick the date]
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TABLE OF CONTENTS I NTRODUCTION I NTRODUCTION A BOUT FIXED EXCHANGE RATE REGIMES 3 T YPES OF EXCHANGE RATES P EGGED EXCHANGE RATES E XAMPLES A DVANTAGES OF F IXED E XCHANGE RATES D ISADVANTAGES OF FIXED EXCHANGE RATES B LACK MARKETS INTERNATIONAL DISAGREEMENTS HOLDS OF RESERVES R EFERENCES 12 INTRODUCTION
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This paper briefly discusses one type of exchange rates – fixed [pegged] exchange rate. It includes advantages and disadvantages of pegging [fixing] exchange rates on the economy. Briefly, advantages of pegging exchange rates are summarized in maintaining a disciplined and stable monetary authority, lowering inflation rate and promoting trade and investment. Disadvantages on the other hand are due to black markets which arise, international disagreements and the large hold of reserves by the government.
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ABOUT FIXED EXCHANGE RATES Types of exchange rates: 1. Float 2. Pegged float or intermediate 3. Pegged (fixed) Fixed (pegged) exchange rates:
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The way a country manages its currency in respect to foreign currencies and the foreign exchange market. The exchange rate is set and maintained by the government. The rate will be pegged to some other country's currency, usually the U.S. dollar. The rate will not fluctuate from day to day. It is closely related to monetary policy and the two are generally dependent on many of the same factors. Countries that have immature, potentially unstable economies usually use a pegged system. Developing nations can use this system to prevent out-of control- inflation. Examples from the history:
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Many Arab countries used to peg their currency to the dollar. However, weaknesses in the US economy (large current account deficit, large national debt) mean that this has become untenable and they have been forced to loosen their peg. China used to peg [fix] the Yuan against the Dollar, but, rather reluctantly they had to let the Yuan appreciate because of the Chinese large current account surplus.
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ADVANTAGES OF FIXED EXCHANGE RATES Fixed exchange rates may be preferable for various reasons: 1. Lowers inflation rate
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This note was uploaded on 03/24/2010 for the course ECONOMICS ECO 202 taught by Professor Ilker during the Spring '10 term at American University in Bulgaria.

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Final report - Price level Quantity of currency S Value of currency S D2[Pick D|D1 the date 1 Quantity 1 Exchange rate 4 1/4 Figure 2 T ABLE OF

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