Chat with AIExam 28: Fixed or Flexible Exchange Rates
What case could be made for a wider "band" of permitted exchange rate changes of the home currency against some foreign currencies (say 15 percent) than against some other foreign currencies (say 10 percent)? What case could be made against this difference in width of permitted variations? Explain.
(30) 
Answered by Examlex AI CopilotThe case for a wider "band" of permitted exchange rate changes of the home currency against some foreign currencies (say 15 percent) compared to others (say 10 percent) could be based on the economic relationship and trade dynamics between the home country and the specific foreign currencies in question.
For example, if the home country has a strong and stable economic relationship with certain foreign countries, it may be beneficial to allow for a wider band of exchange rate changes to accommodate potential fluctuations in trade and investment. This could help to promote stability and flexibility in the exchange rate, which can be beneficial for businesses and investors operating in those markets.
On the other hand, a narrower band of permitted exchange rate changes against other foreign currencies may be justified if there are concerns about volatility or speculative activities in those markets. This could help to mitigate potential risks and maintain stability in the exchange rate for those specific currencies.
However, the case against this difference in width of permitted variations lies in the potential for discrimination and unequal treatment of different trading partners. Allowing for wider exchange rate changes for certain currencies while imposing stricter limits on others could be seen as unfair and could lead to tensions in international trade relations. It may also create opportunities for currency manipulation and unfair competitive advantages for certain countries.
Additionally, a wider band of permitted exchange rate changes for some currencies could lead to increased uncertainty and risk for businesses and investors, as they may struggle to predict and hedge against larger fluctuations in the exchange rate.
In conclusion, while there may be valid economic justifications for allowing different widths of permitted exchange rate changes for different currencies, it is important to carefully consider the potential implications for international trade relations, market stability, and fairness in the global economy. Any differences in permitted variations should be based on transparent and objective criteria, and should be carefully communicated and negotiated with trading partners to avoid potential conflicts and disruptions in the international financial system.
Explain why it is alleged that a system of flexible exchange rates could have "wasteful resource movements." Why are these movements thought to be wasteful? Don't resources need to move between sectors as demand, cost, and profitability conditions change in a dynamic economy?
(39) Answered by Examlex AI CopilotIt is alleged that a system of flexible exchange rates could lead to wasteful resource movements because it can create uncertainty and volatility in the currency markets. This can lead to sudden and unpredictable changes in exchange rates, which can disrupt trade and investment decisions. As a result, resources may be misallocated as businesses and individuals try to hedge against currency fluctuations or take advantage of short-term exchange rate movements.
These movements are thought to be wasteful because they do not necessarily reflect changes in underlying economic fundamentals or productive capacity. Instead, they can be driven by speculative activities or short-term market dynamics. This can lead to inefficient allocation of resources, as businesses may make decisions based on short-term currency movements rather than long-term economic prospects.
While it is true that resources need to move between sectors as demand, cost, and profitability conditions change in a dynamic economy, the concern with wasteful resource movements in the context of flexible exchange rates is that these movements are driven by factors unrelated to real economic conditions. This can lead to misallocation of resources and inefficiencies in the economy, ultimately hindering long-term growth and development. Therefore, it is important to consider the potential negative effects of volatile exchange rates on resource movements and strive for a more stable and predictable exchange rate system.
A major advantage of the system of flexible exchange rates (as opposed to fixed exchange rates) is commonly thought to be
(36) 
VerifiedC
A situation where a country announces a parity value for its currency and permits small variations around that value, but also adjusts the parity regularly by small amounts according to various indicators, is known as
(32) Describe the features of a currency board arrangement. Then indicate general conditions under which the adoption of a currency board by a country would be desirable for the country.
(32) If a country has a currency board arrangement (with a 100 percent reserve system) in Place, then the country's money supply can be increased by a __________ by the Country's central bank.
(37) Suppose that a currency plummets downward because of speculation against it. Can it necessarily be stated that this speculation is "destabilizing" in nature? Why or why not?
(33) Using the IS/LM/BP framework, explain how two of the following shocks impact on the domestic economy under flexible exchange rates and under fixed exchange rates.
(a) an increase in the foreign rate of interest
(b) a decrease in foreign income
(c) a decrease in foreign prices
(28) Present the argument that the adoption of flexible rates would lead to a removal of restrictions on trade. Do you agree that these controls would be eliminated? Does the adoption of flexible rates undermine all the reasons for seeking protection that were covered in the trade policy section of this course? Explain.
(32) The IS/LM/BP analysis suggests that an external real sector shock, such as a rise in national income abroad will cause, under fixed exchange rates, a __________ shift in a Home country's BP curve (assuming that short-term financial capital is not perfectly Mobile), a __________ in the home country's balance of payments, and __________ in The home country's national income.
(42) In view of the theory of optimum currency areas, a country would be a good candidate for membership in such an area if it had a __________ degree of factor mobility with other potential member countries of the currency area and if the country were a relatively__________ economy.
(30) If an important oil exporter such as Saudi Arabia were successful in raising the price of petroleum in the next few weeks, would a flexible exchange rate or a fixed exchange rate for the United States be better for mitigating the negative economic impact upon the United States? Why?
(40) Other things equal, a domestic monetary or financial shock (a shift in the LM curve) Tends to produce what relative degree of GDP change for the home country under a Situation of flexible exchange rates compared to a situation of fixed exchange rates?
(39) If a country's BP curve is flatter than its LM curve, then an external financial shock of a rise in interest rates abroad would, under flexible exchange rates, lead to __________ in The home country's national income. If exchange rates were fixed, this external financial shock would __________ in the home country's national income.
(40) The view that inflation in a country can lead to depreciation of the country's currency which in turn can cause further inflation is known as
(37) In theory, business cycles are __________ likely to be transmitted from one country to another under a system of fixed exchange rates than under a system of flexible exchange rates. It is also a generally-accepted theoretical result by economists that monetary policy is __________ useful for dampening business cycle activity under a system of fixed exchange rates than under a system of flexible exchange rates.
(37) Which one of the following is NOT an alleged disadvantage of a flexible exchange rate system?
(40) Proponents of fixed exchange rates would find the most support for their position in which one of the following empirical results regarding the relationship between
Exchange rate variations and the volume of international trade? (Assume that the empirical tests adequately account for other factors that influence the volume of trade.)
(35) If a country adopts a currency board arrangement, a result is that the country's money supply __________ be increased by the purchase of domestic assets from the country's citizens by the country's central bank; in this arrangement, the country's money supply __________ be increased by the purchase of foreign assets from the country's citizens by the country's central bank.
(30) 
Filters
- Essay(0)
- Multiple Choice(0)
- Short Answer(0)
- True False(0)
- Matching(0)