AP Economics

Mr. Bernstein

Module 43: Exchange Rate Policy

April 15, 2015

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AP EconomicsMr. Bernstein

Exchange Rate PoliciesObjectives - Understand each of the following:• The difference between fixed exchange rates and floating

exchange rates• Considerations that lead countries to choose different

exchange rate regimes

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AP EconomicsMr. Bernstein

Exchange Rate Policy• Governments have more power to influence nominal

Exchange Rates than other prices• Exchange rates are important to countries where

imports and exports are larger share of GDP• Affects relative attractiveness of goods and services

• Exchange Rate regimes• Fixed rates are held constant…known as “pegs” or ‘target

zones”• Floating rates are determined in market

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AP EconomicsMr. Bernstein

How Can an Exchange Rates be Fixed?• Exchange Market Intervention• ie China sells Yuan/buys USD to keep Chinese products

cheap to US consumers• Central Banks maintain foreign exchange reserves • Governments may limit ability to exchange currency; ie

Korea limits foreigners’ ability to buy Won• Fixed rates create stability• Reduces uncertainty• Limits ability to use inflationary monetary policy• Can lead to costs similar to shortages or surpluses created

by price floors and ceilings