Exchange rate system

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7 Terms

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Types of exchange rate systems

fixed exchange rates, managed exchange rates, floating exchange rates

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Fixed exchange rates

central bank, gov intervenes to maintain fixed exchange rates. Value of one currency is fixed to the value of another

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Managed exchange rates

central bank, gov only intervenes to keep exchange rate within a range

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Floating exchange rates

central bank, gov doesn’t intervene to manage exchange rate. Exchange rate is determined by supply and demand of domestic currency.

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Types of exchange rates

nominal exchange rate, real exchange rate

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Nominal exchange rate

tells the price of one currency in terms of another

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Real exchange rate

tells how much a currency is worth relative to the price of goods and services in another country.

Real ER=nominal ER*domestic price level/foreign price level