1. Exchange Rate Policy
Lesson 40
Sections 43, 44, 45

2. 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

3. 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

4. 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