Macroeconomics_Unit4_DB

Macroeconomics_Unit4_DB - Kregg M. Soltow Macroeconomics...

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Kregg M. Soltow Macroeconomics Unit 4 Discussion Board August 11, 2010 American Intercontinental University Describe when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates. There are two traditions that the price of a nation’s currency can be determined against another nation’s currency. A fixed exchange rate is a rate that a government sets and maintains as the official exchange rate for its domestic currency. A set price is fixed against another major world currency. Usually this currency is the US dollar. In order to maintain this exchange rate the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. The central bank of the nation must keep a high level of foreign reserves which it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate inflation or deflation, and ultimately, the exchange rate. What
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Macroeconomics_Unit4_DB - Kregg M. Soltow Macroeconomics...

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