Two exchange rate systems week 6

Two exchange rate systems week 6 - And so, currencies can...

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Two exchange rate systems: 1) fixed / stable rates; devaluation / revaluation possible 2) flexible / floating rates; depreciation / appreciation very common 1
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Fixed exchange rates: 1) are “easier” for traders 2) but might lead to problems in the balance of payment 3) and hence reduce the freedom of government for domestic economic policies 2
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Purchasing Power Parity (PPP) a) suppose inflation in Japan is 4% b) suppose inflation in USA is 7% c) that PPP says that the dollar should depreciate with 3% In reality the “nominal” exchange rates can be very different from the “real” or PPP-rates, because of: a) transport costs b) protectionism c) international capital flows
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Unformatted text preview: And so, currencies can be “overvalued” or “undervalued” for years! 3 TWO WORLD WIDE ORGANIZATIONS: IMF (to help countries with “short term” balance of payments problems) World Bank (for longer term loans) 4 IMF was from 1946 to 1973:-a world wide ‘fund” for countries with short term (and “fundamental”) problems in the balance of payments-AND a world wide fixed exchange rate system Since 1973 the IMF is NOT a world wide fixed exchange rate system any more Countries borrowing from the IMF often have to: 1) devaluate the local currency 2) reduce government expenditure such as subsidies 5...
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This note was uploaded on 05/30/2011 for the course MIM 1001 taught by Professor Fredser during the Spring '11 term at International University in Germany.

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Two exchange rate systems week 6 - And so, currencies can...

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