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Concept
Fixed Exchange Rate
A
fixed exchange rate system
pegs a currency's value to that of another currency or a
basket of currencies
, providing stability in
international prices
and reducing the risk of
currency fluctuations
. However, maintaining a fixed rate requires significant
government intervention
and can limit a country's
monetary policy flexibility
.
Relevant Degrees
International Finance 100%
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Concept
Exchange Rate
Exchange rates
determine the
value of one currency
in relation to another, impacting
international trade
, investment, and
economic stability
. They fluctuate based on factors like
interest rates
, inflation,
political stability
, and
economic performance
of
countries involved
.
Concept
Exchange Rate Policy
Exchange rate policy
involves a country's
strategic approach
to managing its
currency value
in relation to other currencies, impacting
trade competitiveness
, inflation, and
economic stability
. Policymakers can choose between fixed, floating, or
hybrid regimes
to balance between
control and market forces
, aiming to achieve
macroeconomic goals
such as
export growth
or
inflation control
.
Concept
Exchange Rate Stability
Exchange rate stability
refers to the relative steadiness of a
currency's value
against other currencies, which can facilitate
international trade
and investment by
reducing uncertainty
. It is often achieved through
monetary policies
, pegged exchange rates, or
currency interventions
by
central banks
to prevent
excessive fluctuations
that could disrupt
economic stability
.
Concept
Currency Band
A
currency band
is a system of
exchange rate management
where a country's
currency value
is allowed to
fluctuate within a specified range
around a
central value
, providing a balance between fixed and
floating exchange rate regimes
. This approach helps
stabilize the currency
, reducing volatility while still allowing some
flexibility in response to market conditions
.
Concept
Exchange Rate Mechanisms
Exchange Rate Mechanisms
(ERMs) are systems designed to control a country's
currency exchange rate
relative to other currencies, often to stabilize or influence
economic conditions
. They can range from fixed to floating systems, each with varying degrees of
government intervention
and
market influence
to maintain
desired exchange rate levels
.
Concept
Exchange Rate Peg
An
exchange rate peg
is a policy where a country's
currency value
is
fixed relative
to another currency or a
basket of currencies
, aiming to
stabilize the exchange rate
and
reduce volatility
. This approach can help
control inflation
and
foster trade
and investment by providing a
predictable economic environment
, but it requires
significant reserves
of the
foreign currency
to
maintain the peg
and can limit
monetary policy flexibility
.
Concept
Exchange Rate Regimes
Exchange rate regimes
define how a country manages its currency in relation to others, influencing
economic stability
and
trade competitiveness
. They range from
fixed systems
, where the currency's value is pegged to another currency or basket of currencies, to
floating systems
, where the market determines the currency's value.
Concept
Currency Stabilization
Currency stabilization
refers to the process by which a country or economic union aims to reduce the volatility of its currency's exchange rate, ensuring a more
predictable and stable economic environment
. This is often achieved through
monetary policy interventions
, such as
adjusting interest rates
or engaging in
foreign exchange market operations
.
Concept
Bretton Woods System
The
Bretton Woods System
established a framework for
international economic cooperation
post-World War II,
pegging currencies
to the
US dollar
, which was
convertible to gold
. This system laid the
foundation for modern international monetary policy
but collapsed in 1971 when the
US ceased gold convertibility
.
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