Kabir's Econ Blog

November 11, 2009

Three Big Ideas About Exchange Rates

Filed under: Uncategorized — kabir1892 @ 2:35 am

Advantages-Of-Nominal-And-Real-Exchange-Rates

There are things that I found to be the main ideas of exchange rates.

1) Fixed exchange rates: this exchange rate occurs when one currency is fixed in value against another currency. Governments are involved to keep the parity via intervention on the market for currencies. There are positive aspects as well as negative ones. This is because they give certainty, but they can also cause large sums of foreign exchange from national reserves.

2) Floating exchange rates: In this exchange rate, market forces determine rates depending on  how they view a certain country’s performance in trade and the economic stability. The maintenance of these systems cost less, but they can result in changes in the value of the currency. Trade performance and confidence is affected.

3) Managed or dirty float exchange rate: This is similar to floating exchange rates, except that it is determined between upper and lower limits where the domestic governments decide to keep it. This causes stability, but the negative aspect is that there is less cost for national reserves.

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