Exam 15: Exchange-Rate Systems and Currency Crises

Figure 15.2 Market for the British Pound -Refer to Figure 15.2. Demand and supply of British Pounds is initially D₀ and S₀. With a system of floating exchange rates, the equilibrium exchange rate is:

Many developing nations with low inflation rates have pegged their currencies to the U.S. dollar as a way of allowing modest increases in domestic inflation rates.

Most nations currently allow their currencies' exchange values to be determined solely by the forces of supply and demand in a free market.

To temporarily offset an $\underline { \text { appreciation } }$ in the dollar's exchange value, the Federal Reserve could ____ the U.S. money supply which would promote a (an) ____ in U.S. interest rates and a ____ in investment flows to the United States.

A primary objective of dual exchange rates is to allow a country the ability to insulate its balance of payments from net:

In a managed floating exchange-rate system, temporary stabilization of the dollar's exchange value requires the Federal Reserve to adopt a (an) ____ monetary policy when the dollar is appreciating and a (an) ____ policy when the dollar is depreciating.

Small nations, such as Angola and Barbados, peg their currencies to the U.S. dollar since the prices of many of their traded goods are determined in markets in which the dollar is the key currency.