Fixed Vs floating exchange rates

• What is the primary focus of the discussion?

  Advantages and disadvantages of fixed/floating rates
• According to the speaker, what should students do with the information presented?

  Copy it down with space for notes
• What is one of the benefits of a floating exchange rate?

  Reduces the need for currency reserves
• Why is reducing the need for currency reserves considered a benefit?

  Reserves can be costly to maintain
• What does a floating exchange rate allow domestic monetary policy to do?

  Work freely without manipulation
• How do some fixed exchange rate systems affect interest rates?

  Require manipulation to maintain rates
• Which economic issue can a floating exchange rate help to correct?

  A current account deficit
• How does a floating exchange rate help correct a current account deficit?

  By making exports cheaper and imports expensive
• In a country with a large trade deficit, what happens to the currency supply?

  Supply shifts to the right
• How does increased currency supply impact the exchange rate in a floating system?

  It lowers the value
• For countries already export-dependent, how can a falling exchange rate help?

  By increasing export demand
• How does a reduction in exchange rate help prop up the economy?

  It helps increase general growth
• What is one reason that floating exchange rates promote stability?

  Less risk of over/undervaluation
• What does equilibrium in a floating exchange rate system reflect?

  Purchasing power parity
• In what type of exchange rate system are speculative attacks less likely to occur?

  Floating exchange rate system
• What is a major disadvantage of floating exchange rates?

  They can be very volatile
• How does exchange rate volatility affect foreign investment?

  Reduces the incentives
• Why does high volatility in exchange rates discourage trade?

  Foreign countries are unsure of value
• Why is the automatic correction of a current account deficit mainly theoretical?

  Speculation has a bigger impact
• What factor is more likely to affect currency demand and supply than a current account deficit?

  Speculative flows
• How can a lower exchange rate worsen inflation?

  Higher import prices
• Why might an economy with high inflation struggle to export?

  Reduced export competitiveness
• In what way could a lower exchange rate actually push up inflation?

  Through higher import prices
• What is a benefit of a fixed exchange rate?

  Lower exchange rate uncertainty
• How does a fixed exchange rate promote foreign investment?

  Guarantees stability
• What are countries permitted to do in fixed exchange rates?

  Have a band for the exchange rate
• What can a government do to a currency's value in a fixed exchange rate system?

  Devalue or revalue it
• Why is devaluing a currency politically difficult?

  Sign of government weakness
• How does a fixed exchange rate reduce the cost of trade for importers?

  No need to hedge
• What market do importers use to protect against unstable floating exchange rates?

  Future's exchange rate market
• What must domestic producers do to maintain competitiveness in a fixed exchange rate system?

  Increase efficiency
• Why does a fixed exchange rate put discipline on domestic producers?

  Cannot rely on falling rates
• What are the potential macroeconomic consequences of using interest rates to maintain a fixed exchange rate?

  Reduced growth, high unemployment
• What is a key concern regarding speculative attacks on fixed exchange rates?

  The decided rate is incorrect
• What do most economies agree about fixed and floating exchange rates?

  Floating is better than fixed
• What do governments do to solve potential issues with floating exchange rates?

  Intervene when needed
• What type of exchange rate system is described as allowing room for maneuverability?

  Floating with intervention
• What are currency reserves used for in a fixed exchange rate system?

  Maintaining the fixed exchange rate
• How does manipulating interest rates maintain a fixed exchange rate?

  Attracts or deters foreign investment
• How does a current account deficit affect currency supply?

  Increases the currency supply