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user1837483975


Registered: 10/18/09
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Urgent economics question
#14604782 - 06/13/11 06:50 AM (12 years, 7 months ago) |
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First and foremost I am not asking anybody to do my homework for me, I just need a little direction.
My teacher wants us to compare how economies adjust to changes in AD depending on whether they have a fixed or floating exchange rate.
I know it has something to do with being unable to use expansionary monetary policy if you have a fixed exchange rate, but other than that I'm stumped.
Thoughts?
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Doc_T
Random Dude




Registered: 03/06/09
Posts: 42,395
Loc: Colorado
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What's AD?
And you mean exchange rate relative to other currencies, right? Not like gold-to-paper within a country?
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user1837483975


Registered: 10/18/09
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Last seen: 3 years, 10 months
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Re: Urgent economics question [Re: Doc_T]
#14604984 - 06/13/11 08:26 AM (12 years, 7 months ago) |
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Yeah I mean relative to other currencies. AD = aggregate demand.
I have made a little progress since I made this thread and have learned the following:
Quote:
You can change interest rates (i.e. use monetary policy) to affect the level of aggregate demand in an economy.
Example: to increase AD, the central bank might lower interest rates. this reduces the cost of borrowing and leads to increases in consumption and investment. This is expansionary monetary policy.
Lowering interest rates will depreciate the value of the dollar. This is because people will move their money out of the country to places which offer better returns, increasing the supply of the dollar and lowering its value.
The depriciated currency encourages exports, discourages imports, and increases net capital inflow. These exchange rate effects will reinforce the expansionary effects resulting from the lowered interest rates.
But if you have a fixed exchange rate, monetary policy is ineffective
The last bit is what I don't understand - why exactly is monetary policy ineffective in a fixed exchange rate? So far this is the best I can find but it seems to me to have some serious problems, most notably the first diagram that seems to mislabel an appreciation as a depreciation...
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Doc_T
Random Dude




Registered: 03/06/09
Posts: 42,395
Loc: Colorado
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If you have a fixed exchange rate, your money's value is governed by the policies and actions of others.
-------------------- You make it all possible. Doesn't it feel good?
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PassiveAgressive
Sleepy-_-kinoko!




Registered: 10/16/09
Posts: 924
Loc: Tueri honorare saltus
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Quote:
Canberra said: Yeah I mean relative to other currencies. AD = aggregate demand.
I have made a little progress since I made this thread and have learned the following:
Quote:
You can change interest rates (i.e. use monetary policy) to affect the level of aggregate demand in an economy.
Example: to increase AD, the central bank might lower interest rates. this reduces the cost of borrowing and leads to increases in consumption and investment. This is expansionary monetary policy.
Lowering interest rates will depreciate the value of the dollar. This is because people will move their money out of the country to places which offer better returns, increasing the supply of the dollar and lowering its value.
The depriciated currency encourages exports, discourages imports, and increases net capital inflow. These exchange rate effects will reinforce the expansionary effects resulting from the lowered interest rates.
But if you have a fixed exchange rate, monetary policy is ineffective
The last bit is what I don't understand - why exactly is monetary policy ineffective in a fixed exchange rate? So far this is the best I can find but it seems to me to have some serious problems, most notably the first diagram that seems to mislabel an appreciation as a depreciation... 
Im not an economist, though I do recall that Rome tried to "fix" rates and whatnot. Whereas the rate of manufactured goods (crops) couldn't themselves be fixed, to fix the currency outside of it's defining quality is impossible. If there are more crops then that should be reflected in the economy. If there are less crops then that too should show up in the value of a currency. Hope I helped. Get more opinions though
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user1837483975


Registered: 10/18/09
Posts: 2,161
Last seen: 3 years, 10 months
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Re: Urgent economics question [Re: Doc_T]
#14605015 - 06/13/11 08:40 AM (12 years, 7 months ago) |
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Quote:
Doc_T said: If you have a fixed exchange rate, your money's value is governed by the policies and actions of others.
Good to see you have a firm grasp of the obvious there Doc. T! 
But seriously, can anyone shed any specific light on monetary policy in a fixed exchange rate? My balls are well and truly crocodile clipped to a car battery on this one....
Anyway, does what I wrote make sense to everyone? Is there anything I should re-write or explain better? It should make sense to someone who hasn't studied economics, that's my goal.
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Noetical
Flip Horrorshow

Registered: 11/28/04
Posts: 9,230
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Think of the demands that a fixed exchange system places on a Central Bank (in terms of convertability with the peg) when the external market's valuation of the currency stongly diverges from that of the set policy.
Look up Argentina in the 90's and how Soro's broke the Bank of Britain for some real world occurences.
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