AP Economics Mr. Bernstein Module 43: Exchange Rate Policy April 15, 2015

AP Economics Mr. Bernstein Exchange Rate Policies Objectives - 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 2

AP Economics Mr. 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 3

AP Economics Mr. 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 4