Chapter 4 Fixed, Floating and Managed Exchange Rat...
Exercises
1.Single-choice questions
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2.Noun explanation
(1)The spot exchange rate
The spot exchange rate is the quotation between two currencies for immediate delivery.
(2)The forward exchange rate
The rate of exchange at which a purchase or sale can be made is known as the forward rate.
(3)Nominal exchange rate
The exchange rate that prevails at a given date is known as the nominal exchange; it is the amount of US dollars that will be obtained for one pound in the foreign exchange market.
(4)Real exchange rate
The real exchange rate is the nominal exchange rate adjusted for relative prices between the countries under consideration.
3.Essay questions
(1)
Real effective exchange rate is an effective exchange rate based on real exchange rates as opposed to nominal exchange rates.On the one hand, it is a kind of effective exchange rate which is a measure of the weighted-average value of a currency relative to a selected group of currencies.On the other hand, it is based on real exchange rate although calculated in much the same way as a nominal effective exchange rate.In contrast to calculating effective nominal exchange rates, however, we use real exchange rates in computing the real effective exchange rate.
(2)
In general, there are mainly three measurement of exchange rate change.
The first is the “point” of exchange rate change.
The second is the percentage of exchange rate change, which is the difference between the final exchange rate and the initial exchange rate as a percentage of the initial exchange rate during a certain period.
The third measurement is the exchange rate index, including the bilateral exchange rate index and the effective exchange rare index.
(3)
a.Impact on the balance of payment
(a)Trade balance
If an economy is not under the full of employment, the depreciation of exchange rate will improve trade balance; however, when the economy is under the full of employment, it will cost more to employ more resource and thus the inflation will erode the monetary effect.
(b)Capital flow
If an economy has depreciated and is expected to further depreciate in the future, capital flight will be triggered; however, if the currency is expected to be appreciated in the future and the environment is suit for investment, the capital flow will come back.
(c)Foreign exchange reserve
Foreign exchange reserve will be directly influenced by the change of trade balance and capital flow and the loss of actual value of foreign exchange reserve will be caused.
b.Impact on domestic economy
(a)Domestic prices
Exchange rate depreciation will favor the exportation and raise the cost of imported raw material.
(b)Income and employment
Exchange rate depreciation will enlarge the scale of domestic production.
(c)National industry and adjusting economic structure
(4)
a.Fixed exchange rates promotes international trade and investment.
b.Fixed exchange rates provide discipline for macroeconomic policies.
c.Fixed exchange rates promote international cooperation.
d.Speculation under floating rates is likely to be destabilizing.
(5)
a.Floating exchange rates ensure balance-of-payments equilibrium.
b.Floating exchange rates ensure monetary autonomy.
c.Floating exchange rates insulate economies.
d.Floating exchange rates promote economic stability.
e.Private speculation is stabilizing.