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A currency peg is a policy by which a national government sets a fixed exchange rate between its currency and a foreign currency, typically the US dollar or the euro, to stabilize its economy. This strategy can help control inflation and foster economic stability but may limit the country's monetary policy flexibility and expose it to external economic shocks.
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Monetary policy is a crucial economic tool used by central banks to control the money supply and interest rates, aiming to achieve macroeconomic objectives such as controlling inflation, consumption, growth, and liquidity. It involves various strategies, including open market operations, discount rates, and reserve requirements, to influence economic activity and maintain financial stability.
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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.
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Foreign exchange reserves are assets held by a central bank in foreign currencies, which are used to back liabilities and influence monetary policy. They are crucial for maintaining exchange rate stability, facilitating international trade, and ensuring a country can manage its external obligations during economic uncertainty.
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The Balance of Payments is a comprehensive record of a country's economic transactions with the rest of the world over a specific period, typically a year. It includes the trade balance, capital flows, and financial transfers, providing insights into a nation's economic stability and its ability to pay for imports and service its debts.
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Central Bank Intervention refers to actions taken by a central bank to influence a country's currency value or monetary policy to achieve specific economic goals, such as controlling inflation, stabilizing the currency, or promoting economic growth. These interventions can include altering interest rates, buying or selling government bonds, or directly engaging in foreign exchange markets.
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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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International trade involves the exchange of goods and services across international borders, driven by comparative advantage, which allows countries to specialize and increase their economic welfare. It is regulated by international agreements and organizations that aim to reduce trade barriers and promote fair competition.
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A currency board is a monetary authority that pegs the national currency's exchange rate to a foreign currency, maintaining full convertibility and backing it with foreign reserves. This system limits the central bank's ability to conduct independent monetary policy, aiming to ensure stability and confidence in the currency's value.
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Currency pegging is a monetary policy in which a country fixes its currency's exchange rate to another currency, typically the US dollar or euro, to stabilize trade and investment. This can help maintain economic stability but may also limit the country's ability to respond to economic shocks and lead to imbalances if the peg is misaligned with market conditions.
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