Week11ExchangeRateSystems

Week11ExchangeRateSystems - Week 11 Exchange Rate Systems:...

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Week 11 Exchange Rate Systems: dealing with financial crises… I. Different types of exchange rates . A. Law of one Price and Purchasing Parity: an identical good should cost the same in all nations, assuming costless shipping and no barriers. 1.) The formula is S=p/p* 2.) This means that goods cost the same in all countries. B. Countries choose between a float independtely or in float in unison. 1.) In the case for Purchasing Power Parity=exchange rates are related to differences in the level of prices between two countries. 2.) Changes in relative national price levels determine changes in exchange rates over the long run. i.e. if a country is fixed or pegs to another country it makes their currency less risky. Purchasing Power Parity only works in theory, and is based on long run or “law of one price.” II. Fixed exchange-rate system A. Fixed exchange rates are common in developing countries because of high inflation. 1.) Developing countries stabilize domestic-currency prices of their imports and exports by pegging another country. 2.) This will restrain domestic policies and reduce inflation . B. The developing nations will anchor with group or “basket of currencies” 1.) They will have more than one trading partner. 2.) This is set by the IMF: Euro, pounds, dollar, Yen III. More Fixed Exchange-rate system A. For it to be fixed has a par value/official exchange rate.
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Week11ExchangeRateSystems - Week 11 Exchange Rate Systems:...

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