4.2.6.4 Exchange rate systems NOTES

What primarily determines exchange rates in freely floating exchange rate systems?

• International trade agreements

• Fixed pegs against major currencies

• Supply and demand in the foreign exchange market

• Government policies

What does the demand for a currency arise from?

• Foreign investors purchasing local stocks

• Local investors converting foreign assets

• Reduction in export activities

• Government interventions

Which of the following is a method of government intervention in the foreign exchange market?

• Direct Intervention

• Imposing trade tariffs

• Decreasing the national debt

• Increasing import quotas

What is an advantage of fixed exchange rate systems?

• Encourages speculative investments

• Frequent adjustments to economic conditions

• Promotes exchange rate stability

• High flexibility in monetary policies

Which disadvantage is associated with floating exchange rate systems?

• Misalignment with economic fundamentals

• Vulnerability to speculative attacks

• High cost of maintaining the exchange rate

• Exchange rate volatility

What does monetary policy independence allow in floating exchange rate systems?

• Governments to impose capital controls

• Fixed currency values

• Central banks to pursue domestic objectives

• Businesses to predict exchange rates accurately

What is a benefit of a country joining a currency union like the Eurozone?

• Ability to impose individual fiscal policies

• Freedom to set local interest rates

• Elimination of exchange rate uncertainty

• Complete monetary policy independence

What is a disadvantage of fixed exchange rate systems?

• Allows for automatic economic adjustments

• Promotes high exchange rate volatility

• Requires active government intervention

• Reduces the risk of currency crises

Which factor influences changes in supply and demand conditions for currencies?

• Cultural influences

• Interest rates

• Local sports events

• National holidays

What is a disadvantage of joining a currency union?

• Enhanced trade within the union

• Loss of monetary policy independence

• Increased currency credibility

• Reduction in transaction costs