foreign exchange
Explain, with the help of a diagram, how a government can maintain a stable foreign exchange rate. [8]
For a knowledge and understanding of the influence of supply and demand in setting the foreign exchange rate. Up to 4 marks
For application showing how a government can maintain a foreign exchange rate through intervention in the foreign exchange market. Up to 4 marks
(6 marks maximum if no diagram provided
A fixed exchange rate, sometimes called a pegged exchange rate, is also referred to as the Tag of particular Rate, which is a type of exchange rate regime where a currency's value is fixed against the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.
A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable and is especially useful for small economies in which external trade forms a large part of their GDP.
It can also be used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, according to the Mundell–Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.
There are no major economic players that use a fixed exchange rate (except the countries using the euro and the Chinese yuan). The currencies of the countries that now use the euro are still existing (for old bonds).[citation needed] The rates of these currencies are fixed with respect to the euro and to each other.[citation needed] The most recent such country to discontinue their fixed exchange rate was the People's Republic of China, which did so in July
For a knowledge and understanding of the influence of supply and demand in setting the foreign exchange rate. Up to 4 marks
For application showing how a government can maintain a foreign exchange rate through intervention in the foreign exchange market. Up to 4 marks
(6 marks maximum if no diagram provided
A fixed exchange rate, sometimes called a pegged exchange rate, is also referred to as the Tag of particular Rate, which is a type of exchange rate regime where a currency's value is fixed against the value of another single currency, to a basket of other currencies, or to another measure of value, such as gold.
A fixed exchange rate is usually used to stabilize the value of a currency against the currency it is pegged to. This makes trade and investments between the two countries easier and more predictable and is especially useful for small economies in which external trade forms a large part of their GDP.
It can also be used as a means to control inflation. However, as the reference value rises and falls, so does the currency pegged to it. In addition, according to the Mundell–Fleming model, with perfect capital mobility, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.
There are no major economic players that use a fixed exchange rate (except the countries using the euro and the Chinese yuan). The currencies of the countries that now use the euro are still existing (for old bonds).[citation needed] The rates of these currencies are fixed with respect to the euro and to each other.[citation needed] The most recent such country to discontinue their fixed exchange rate was the People's Republic of China, which did so in July