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6 Cards in this Set
- Front
- Back
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What are the advantages of a fixed exchange rate? Why are they advantages? |
Certainty, as rates aren't likely to fluctuate. This results in more trade and investment, and reduces unemployment. Without depreciation, businesses forced to improve competitiveness. Price transparency |
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What are disadvantages of a fixed rate? |
No automatic correction for trade deficit, may push further away from Balance of Payment equilibrium. No autonomy over domestic monetary policy. Might have wrong fixed rate,e.g UK early 90's |
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What sort of exchange rate does the UK have? |
Floating |
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What are the advantages of a floating rate? |
Automatic adjustment - if there's recession the pound will depreciate, allowing exports to continue cheaply. Automatic correction for trade deficit Autonomy over domestic monetary policy |
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How does a floating exchange rate correct a trade deficit? |
With B of P deficit, £ will depreciate, making exports cheaper. This reduction in price improves aggregate demand for UK exports, brining the balance of payments closer to equilibrium. |
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What are the disadvantages of a floating rate? |
Lower international trade and investment, as a result of fluctuations and uncertainty. Lack of discipline on domestic producers, as productivity doesn't have to improve if pound depreciates. This results in low productivity. Currency may become overvalued/undervalued due to speculative flows and hot money. Reduced price transparency. |
