manages its currency in relation to other currencies and the foreign exchange market .Thus‚ it is basically the foreign exchange policy of a country or a trading block (such as European Union). There are currently three basic types of exchange rate regimes – Floating Exchange Rate (the market dictates movements in the exchange rate) Pegged Float (where a central bank keeps the rate from deviating too far from a target band or value) Fixed Exchange Rate (ties the currency to another currency (US dollar
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The Bretton-Woods system Floating exchange rate The Gold Standard The Gold Standard last from1870 to 1914 and from 1918 to1939. Under this system the countries fixed the price of their currency in terms of gold. All the currency ’s prices were fixed in relation to the official gold reserve. The Gold Standard faced its first crisis during the first World War. Most of the countries to finance the cost of the war abandoned the gold standard and by doing so caused an increase in inflation
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regime is the way a country manages its currency in respect to foreign currencies and the foreign exchange market. Each country has its exchange rate policy which determines the form of a government influence on the currency exchange rate. There are three main type of the exchange rate regime: • a floating exchange rate‚ where the market dictates the movements of the exchange rate‚ • and the fixed exchange rate‚ which ties the currency to another currency‚ • a pegged float‚ where the central
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is the price of one country’s currency in terms of another country’s currency Quoted exchange rates can be either direct or indirect‚ Direct: home currency per unit of foreign currency 39 Rupees per US Dollars 80 Rupees per Pound Indirect: foreign currency per unit of home currency 0.0255102 US Dollar per Indian Rupee 0.491594 Pound per Indian Rupee Appreciation of Currency Currency Appreciation means that the given currency has become more valuable with
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– completely free or fixed exchange rates – is suitable. A mixed system is preferable – with improvements to the status quo‚ though. An exchange rate regime with few big currency areas‚ which are linked to each other with flexible exchange rates‚ should be the aim of reforms. This should correspond to a multi-polar key currency system with the currently dominating US Dollar and the Euro as well as the Chinese Renmimbi as most important actors. These developments should be accompanied by substantial
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replacement of their domestic currencies by a foreign currency either as a store of value‚ unit of account or as a medium of exchange. However‚ after a flow in economic literature on currency substitution‚ where the effectiveness of monetary policy was the issue‚ the efforts to stabilize inflation relegated dollarization to a secondary role. In Uruguay‚ Turkey‚ Peru even though the topic never lost its appeal‚ the apparently never-ending appreciation of the national currency started in the midst made
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in the region. In the Asian Financial Crisis‚ the economy in Hong Kong did not sufferer from any banking or currency crisis like some of the Asian countries such as Indonesia‚ Malaysia‚ South Korea and Thailand‚ which their troubles began with a severe depreciation in their currencies. This triggered capital outflow and bankruptcy of many financial intermediaries and firms. The currencies of these countries have long been maintained at a relatively constant rate with the US dollar until 1995. Their
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FIGURE 1.1 Figure 1.1 above shows the four main fluctuations that have happened to the AUD/USD exchange rate in the past eighteen months that will be discussed in this essay. To understand these movements‚ the demand and supply for these two currencies on the foreign exchange market has to be discussed. FIGURE 1.2 The foreign exchange market concerning the AUD/USD is a flexible exchange rate system‚ and is determined by free market forces. Like any other free market‚ it can be modeled
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Aggregate demand will fall. It has to be repaid dissolving the following assets country holds 1. Foreign exchange deposits country has earned through the trade 2. Inward remittances done by nationals of that country staying abroad 3. Cash / Gold reserves 4. If any of the above is not present then taking short term loan from World bank or IMF Q 2. What option do countries like the United States‚ Japan‚ and Australia have to finance or cover a current account deficit that is not
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Account - purchases and sales of goods and services Financial Account - capital transactions Reserves Account - changes in official reserves Debit entry - purchase of domestic goods‚ services‚ or assets‚ or a decline in liabilities to foreigners. Credit Entry - sale of debit entry. Double entry book keeping ensures that debits = credits (sum of all transactions = zero). In the absence of official reserve transactions‚ financial account surplus must offset the current account deficit‚ vice versa
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