Week11ExchangeRateSystems - Week 11 Exchange Rate Systems...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/12/2010 for the course GENB GENB 3353 taught by Professor Ruxendraprodan during the Spring '10 term at University of Houston.

Page1 / 7

Week11ExchangeRateSystems - Week 11 Exchange Rate Systems...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online