IFM8e-IM-ch06 - Chapter 6 Government Influence on Exchange...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 6 Government Influence on Exchange Rates Lecture Outline Exchange Rate Systems Fixed Exchange Rate System Freely Floating Exchange Rate System Managed Float Exchange Rate System Pegged Exchange Rate System Classification of Exchange Rate Arrangements A Single European Currency Membership Euro Transactions Impact on European Monetary Policy Impact on Business within Europe Impact on the Valuation of Businesses in Europe Impact on Financial Flows Impact on Exchange Rate Risk Status Report on the Euro Government Intervention Reasons for Government Intervention Direct Intervention Indirect Intervention Exchange Rate Target Zones Intervention as a Policy Tool Influence of a Weak Currency on the Economy Influence of a Strong Currency on the Economy How Central Bank Intervention Can Affect an MNC’s Value 76
Background image of page 1

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

View Full DocumentRight Arrow Icon
77 International Financial Management Chapter Theme This chapter introduces the various exchange rate systems. In addition, it stresses the manner by which governments can influence exchange rates. Since exchange rate movements are critical to an MNC’s performance, and the government has much influence over these exchange rates, the MNC is affected by government intervention. Topics to Stimulate Class Discussion 1. If you were elected to choose between a fixed, freely floating, or a dirty float exchange rate system, which would you choose for your home country? Why? a. Assume that both the U.S. and Europe experience high unemployment. How can the U.S. central bank attempt to adjust the dollar value to reduce this problem? Is the European central bank likely to go along with the U.S. central bank’s strategy or retaliate? Why? POINT/COUNTER-POINT: Should China Be Forced to Alter the Value of Its Currency? POINT: In 2004, some U.S. politicians wanted to pressure China to increase the value of the Chinese yuan, which is tied to the U.S. dollar. They claimed that the yuan was the cause of the large U.S. trade deficit with China. This issue is periodically raised not only with currencies tied to the dollar, but also with currencies that have a floating rate. Some critics argue that the exchange rate can be used as a form of trade protectionism. That is, a country can discourage or prevent imports and encourage exports by keeping the value of its currency artificially low. COUNTER-POINT: China might counter that its large balance of trade surplus with the U.S. has been due to the differences in prices between the two countries, and that it should not be blamed for the high U.S. prices. It might argue that the U.S. trade deficit can be partially attributed to the very high prices in the U.S., which are necessary to cover the excessive compensation for executives and other employees at U.S. firms. The high prices in the U.S. encourage firms and consumers to purchase goods from China. Even if China’s yuan is revalued upward, this does not necessarily mean that the U.S. firms and consumers will purchase U.S. products. They may shift their purchases from China to
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/05/2010 for the course FIN 6098 taught by Professor Uknown during the Fall '10 term at East Texas Baptist University.

Page1 / 14

IFM8e-IM-ch06 - Chapter 6 Government Influence on Exchange...

This preview shows document pages 1 - 3. Sign up to view the full document.

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