Economics assignment questions?
1. What are the differences between sterilized vs nonsterilized intervention? How effective are they under managed float vs fixed exchange rate system? Costs and benefits to intervention?
2. What are the different approaches to exchange rate and balance of payments determination?
Answer:
There are three basic ways that a country can manage its exchange rate and balance of payments. The first is a completely market determined exchange rate which the government does not attempt to control or influence. This has been used by the developed countries since the 1970s. Under this system, the balance of payments is always in balance because the government does not intervene.
The second is when a country essentially adopts the currency of another country as its own. For example, some Eastern European countries have adopted the Euro as their currency even though they are not part of the European Union. Other countries have adopted the US dollar as its currency. A currency board is another way of adopting another country's currency as your own, for example, Argentina.
The third and probably the worst option is for a country to adopt a "managed exchange rate policy." Under this system, the government tries to maintain a fixed exchange rate with some other currency such as the US dollar unless it is necessary to change it. Like most other attempts by governments to fix prices, this usually ends up as a mess.
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