Exchange Rate Policy Lesson 40 Sections 43, 44, 45

Exchange Rate Policy (43) Exchange Rate Regimes Fixed Exchange Rate Floating Exchange Rate How Can an Exchange Rate Be Held Fixed? The Exchange rate may be higher or lower than the equilibrium point 1 – Soak up extra currency by buying it’s own currency on the foreign exchange market Exchange market intervention 2 – Increase the interest rate This will cause money to flow into the country raising the value of the currency 3 – Limit buying of foreign currencies Licenses or laws that prevent trades (foreign exchange control) Exchange Rate Dilemma Fixed or float

Exchange Rates and Macroeconomic Policy (44) Devaluation and Revaluation of Fixed Exchange Rates Devaluation reduces value Revaluation increases value Monetary Policy Under a Floating Exchange Rate Regime International Business Cycles

Putting it All Together A Structure for Macroeconomic Analysis 1- Starting Point (recognize situation) 2 – A Pivotal Event 3 – Initial Effects of the Event 4 – Secondary and Long-run effects of Event