ECON216_Spring2011_Tutorials_Ch_15_Questions_and_Solution

ECON216_Spring2011_Tutorials_Ch_15_Questions_and_Solution -...

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ECON216 Chapter 15 solution 1. What are the advantages of fixed exchange rates compared to flexible exchange rates? The advantages of a fixed exchange rate system are lower uncertainty and since the exchange rate does not change it can be less inflationary. The main disadvantage of a fixed exchange rate system is that the exchange rate has to be maintained by the central bank and there is no automatic correction of a balance of payments deficit. Flexible exchange rates have the advantage of automatic correction of a balance of payments disequilibrium. There is more volatility and uncertainty regarding exchange rates. Flexible exchange rates are more likely to be inflationary and to lead to greater exchange rate volatility. 2. a) Explain the difference between an optimum currency area and a fixed exchange rate system. b) What are the main advantages and disadvantages of an optimum currency area? c) What are the requirements for a well functioning optimum currency area? a.
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ECON216_Spring2011_Tutorials_Ch_15_Questions_and_Solution -...

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