09_Lecture_Slides_Part_2_with_Graphs

09_Lecture_Slides_Part_2_with_Graphs - Economics 104 Fall...

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Unformatted text preview: Economics 104 Fall 2010 12 The Open Economy Continued Readings Chapter 12 (and parts of chapter 17) Outline 1. The balance of payments 2. Exchange rates: definitions and measures 3. Flexible exchange rates 4. Fixed exchange rates 5. Fixed versus flexible exchange rates Economics 104 Fall 2010 13 4. Fixed exchange rates A fixed exchange rate is an exchange rate value for the domestic currency that is determined and maintained by the government. Examples include many smaller countries and some important larger countries such as China (a managed, crawling peg, fixed exchange rate). Key features: Announced value(s) for exchange rate, usually against a major currency (e.g. $US). Central bank a major participant in the foreign exchange market. Foreign exchange reserves are required to maintain the fixed exchange rate. As well, exchange controls may be used. An unofficial or black market exchange rate is likely to exist. Discussion here focuses on unilaterally fixed exchange rates, where one country elects to fix its currency against another. The alternative is a cooperative system of fixed exchange rates. Economics 104 Fall 2010 14 For example, Venezuela: 1 . All requests for foreign exchange at the official exchange rate must be approved by the National Exchange Control Administration (CADIVI), and the Central Bank (BCV) completes all legal purchase and sale of foreign currency. ...central bank a major participant in the foreign exchange market . On January 11, 2010, the Venezuelan Government devalued the bolivar and established two official exchange rates, one of 2.6 bolivars=U.S. $1.00 (for certain transactions) and another of 4.3 bolivars=U.S. $1.00 (for other transactions)....
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This note was uploaded on 01/28/2011 for the course ECON 104 taught by Professor Voss during the Winter '10 term at University of Victoria.

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09_Lecture_Slides_Part_2_with_Graphs - Economics 104 Fall...

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