Chapter 15: Review Questions and Problems 1 & 6
What are the alleged advantages of a fixed over a flexible exchange rate system? Fixed rates has a smaller degree of uncertainty than flexible rates. Fixed has more stability and less inflation that flexible exchange rates system. Fixed rates have less fluctuation that flexible exchange rates if we were to compare them both. Fixed rates have a greater degree of fixity which helps to fight against inflation. How do advocates of flexible exchange rates respond? They disagree with the advantages of a fixed exchange rate system they argue that the destabilizing speculation is less likely to occur when the exchange rates continuously adjust. The advocates of fixed exchange rates believe that fixed exchange rates impose a price discipline on the nation not present under flexible exchange rates. What overall conclusion can be reached on whether flexible or fixed exchange rates are preferred? The overall conclusion is an investment that whether fixed or flexible they can have some degree of uncertainty. However, a flexible exchange rate system does not seem to compare unfavorably to a fixed exchange rate system as far as the type of speculation to which it gives rise and the degree of uncertainty. Draw a figure showing the fluctuation in the exchange rate over the business cycle without speculation, with stabilizing speculation, and with destabilizing speculation.
Explain the difference between an optimum currency area and a fixed exchange rate system. Optimum currency area is when a group of nation currencies are linked to through permanently fixed exchange rates and the conditions that would make such an area optimum. Fixed is when value of a country's currency, in relation to the value of other currencies, is maintained at a fixed conversion rate. What are the main advantages and disadvantages of an optimum currency area? The main advantage of optimum currency area is that more likely to be balanced which are beneficial under the following conditions: (1) the greater is the mobility of resources among the various member nations, (2) the greater their structural similarities, and (3) the more willing they are too closely coordinate their fiscal, monetary, and other policies. An optimum currency area should aim at maximizing the benefits from permanently fixed exchange rates and minimizing the costs. It is not easy, however, to actually measure the net benefits accruing to each member nation or region from joining an optimum currency area. The disadvantage is optimum currency areas is that each member nation cannot pursue its own independent stabilization and growth policies attuned to its particular circumstances. What are the requirements for a well-functioning optimum currency area? A currency area is when the exchange rates are fixed. With greater is the mobility of resources among the various member nations, the greater their structural similarities, and the more willing they are too closely coordinate their fiscal, monetary, and other policies. Indicate the benefits and costs of EMU member countries from the establishment of the euro. to save as much as $30 billion per year); (2) elimination of exchange rate volatility among the currencies of participating countries; (3) more rapid economic and financial integration of participating nations; (4) the participation of each member nation in determining the common monetary policy; (5) greater economic and budgetary discipline for member countries; (6) seigniorage from the use of the euro as an international currency; (7) reduced cost of borrowing in international financial markets; and (8) increased economic and political importance for the EMU in international affairs. Indicate the difference among a a. fixed exchange rate system, currency board arrangement and dollarization Fixed exchange rate system - Fixed is when value of a country's currency, in relation to the value of other currencies, is maintained at a fixed...
References: Salvatore, D. (2005). Introduction to International Economics. Hoboken, NJ: John Wiley & Sons, Inc.
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