Exchange rate mechanisms (1 Viewer)

[Jaserius]

Hey there fellow economics students,

I have no idea about this dot point in the syllabus, mainly because my leading edge text book does not explore it in much detail. It says

"Use supply and demand diagrams to explain how the value of a currency is determined under a variety of exchange rate mechanisms."

What mechanisms do I have to know, and How is the value of a currency determined according to these mechanisms?

Cheers y'all.

 

[Huratio]

i think the ones you mean is the different exchange systems (e.g. clean float, dirty float, managed and fixed): In the Bulmer book it has the supply and demand diagrams, have a look at that section...

 

[Ednaw]

hmm, umm
Under a fixed, there is a fixed supply of the currency. (demand fluctuates but the central bank/gov limit the supply of $A) the cb/gov use to change the value every sunday i belive

Under a fixed peg (it becomes more likely influenced by demand more) it should become closer to equilibrium however the supply is still being dictated by banks/gov (set every day at 9am)

and under a flexible its pure market forces.

Thats it i think, but im prolli wrong haha, i need to revise this stuff

 

[Mandy101]

In Bulmer Updated Economics they give a couple of diagrams to illustrate floating/fixed exchange rates. Floating ex/r is basically just your basic supply and demand diagram (crossing lines) with an equilibrium where they meet (the market determined exchange rate). For fixed exchange rates, there are two diagrams - when the RBA buys and when the RBA sells. You'll have to try and source a textbook which shows you how to draw them, because they're quite complicated to explain.

A floating exchange rate is where the forces of demand and supply determine an equilibrium market price for the currency. A fixed currency is where the central government pegs the price for long periods of time by either buying or selling foreign reserves to maintain the price. A managed float occurs when either a) the central government pegs the exchange rate at a fixed point for short periods of time (a day, a week, a month) or b) announces intervention into the market through influencing cash rates and the money market.