Google
Saturday 
October 20, 2018 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
TOTAL FIXED COST: Cost of production that does NOT change with changes in the quantity of output produced by a firm in the short run. Total fixed cost is one part of total cost. The other is total variable cost. At any and all levels of output, fixed cost is the same. It doesn't change. This includes cost that is not dependent on, or unrelated to, production. The best way to identify fixed cost is to produce zero output. Fixed cost is incurred whether or not any output is produced. A cost measure directly related to total fixed cost is average fixed cost.

Visit the GLOSS*arama


EXCHANGE RATE POLICIES:

Policies undertaken by domestic governments often in conjunction with international financial organizations to control exchange rates through foreign exchange markets. The three most common exchange rate policies are flexible exchange rates, fixed exchange rates, and managed flexible exchange rates. Flexible exchange rates are allowed to adjust through unrestrained forces of demand and supply in the foreign exchange market. Fixed exchange rates are established at a given level. Managed flexible exchange rates are allowed to change within boundaries, but subject to control if they change too much.
Currency exchange rates are commonly subject to government control through three exchange rate policies -- flexible exchange rate, fixed exchange rate, and managed flexible exchange. These policies are designed generally to affect international trade among countries, as well as the balance of trade and balance of payments of particular countries.

Exchange rates are the price of one nation's currency in terms of another nation's currency, or the rate at which one currency is traded for another. For example, an exchange rate of two U.S. dollars per British pound means that the price of a British pound is two dollars.

Exchange rates are key to international trade, exports and imports flowing among countries. First and foremost, the trading of goods and services requires the exchange of currencies. When buyers in the United States purchase goods from England, they need ultimately need British pounds to complete the transaction. However, the resulting exchange rate also affects exports and imports, which is where exchange rate policies come into play.

Controlling Rates

An exchange rate reflects the value of one currency relative to another. All things considered, if one country has twice as much currency in circulation as another, then each unit of that currency is worth half as much. As such, the primary way to control exchange rates is to control the quantity of money in circulation.

If the United States, for example, wants to increase the exchange rate for British pounds from 2 dollars per pound to 3 dollars per pound, it can do so by increasing the quantity of U.S. dollars in circulation. With more U.S. dollars, the value of each is less and more are needed to purchase one British pound. Of course, a decrease in the exchange rate, say from 2 dollars per pound to 1 dollar per pound, can be had by decreasing the quantity of U.S. dollars in circulation. The same results can also be obtained with opposite changes in the quantity of British pounds in circulation.

However, rather than an economy-wide money supply change, the change is usually targeted at a particular exchange rate. The United States government, for example, can change the dollar-pound exchange rate by buying or selling British pounds in the dollar-pound foreign exchange market. In so doing, the quantity of dollars either increases (when buying pounds) or decreases (when selling pounds).

Like other government policies actions, exchange rate controls have secondary consequences. Changes in the money supply are bound to affect the performance and stability of domestic economy, especially the inflation rate.

Flexible Exchange Rate

The first of three policy options is a flexible exchange rate, which is essentially a policy of letting the foreign exchange market adjust to equilibrium in response to changes in demand or supply. A flexible exchange rate, also termed floating exchange rate, is an exchange rate determined through the unrestricted interaction of supply and demand in the foreign exchange market.

A flexible exchange rate means that a country is NOT trying to manipulate currency prices to achieve some change in the exports or imports. This policy is based on the presumption that the free interplay of market forces is most likely to generate a desireable pattern of international trade. However, if a desireable pattern is not achieved, then tariffs, import quotas, or other trade policies might be enacted. It also provides a benchmark for the analysis of other policies.

Fixed Exchange Rate

The second of three policy options, a fixed exchange rate, is in direct contrast to a flexible exchange rate. This is a policy of setting the foreign exchange rate at a given level. A fixed exchange rate is an exchange rate that is established at a specific level and maintained through government actions (usually through monetary policy actions of the central bank).

To fix an exchange rate, government must be willing to buy and sell currency in the foreign exchange market in whatever amounts are necessary to keep the exchange rate fixed at a specified level. A fixed exchange rate typically disrupts the flow of trade, the balance of trade, and the balance of payments for a country. But in many cases, this is exactly what a country is seeking to do.

Setting the exchange rate at a low level, below the flexible exchange rate, encourages exports and discourages imports, which increases net exports. Setting the exchange rate at a high level, in contrast, discourages exports and encourages imports, which decreases net exports. Moving from a higher to lower exchange rate is termed devaluation or depreciation of currency. Moving from a lower to higher exchange rate is termed revaluation or appreciation of currency.

Managed Flexible Exchange Rate

The third policy option combines flexible and fixed exchange rates and is termed a managed flexible exchange rate, or managed float. A managed flexible exchange rate, or managed float, is an exchange rate that is generally allowed to adjust due to the interaction of supply and demand in the foreign exchange market, but with occasional intervention by government.

Most nations of the world currently use a managed flexible exchange rate policy. With this alternative an exchange rate is free to rise and fall, but it is subject to government control if it moves too high or too low. With managed float, the government steps into the foreign exchange market and buys or and sells whatever currency is necessary keep the exchange rate within desired limits.

The logic behind this policy is that an unrestricted movement in an exchange rate is generally beneficial, but serious problems in the balance of payments and balance of trade can occur if it changes too far in either direction.

<= EXCHANGE RATEEXCHANGE RATES, AGGREGATE DEMAND DETERMINANT =>


Recommended Citation:

EXCHANGE RATE POLICIES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: October 20, 2018].


Check Out These Related Terms...

     | foreign exchange market | foreign exchange | exchange rate | flexible exchange rate | fixed exchange rate | managed flexible exchange rate |


Or For A Little Background...

     | international finance | international trade | international economics | foreign trade | balance of trade | money | currency | open economy | closed economy | domestic sector |


And For Further Study...

     | balance of payments | current account | capital account | international market | free trade areas | trade barriers |


Related Websites (Will Open in New Window)...

     | Federal Reserve System | World Trade Organization | North American Free Trade Agreement | General Agreement on Tariffs and Trade | European Union | International Monetary Fund |


Search Again?

Back to the WEB*pedia


APLS

YELLOW CHIPPEROON
[What's This?]

Today, you are likely to spend a great deal of time wandering around the downtown area seeking to buy either a coffee cup commemorating last Friday (you know why) or a wall poster commemorating the first day of spring. Be on the lookout for empty parking spaces that appear to be near the entrance to a store.
Your Complete Scope

This isn't me! What am I?

In the Middle Ages, pepper was used for bartering, and it was often more valuable and stable in value than gold.
"Failure is the opportunity to begin again, more intelligently. "

-- Henry Ford, automobile manufacturer

DSE
Detroit Stock Exchange
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2018 AmosWEB*LLC
Send comments or questions to: WebMaster