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Exchange Rate Systems
The classifications of exchange rate systems including hard peg, soft peg, managed float, and free float.
Floating Exchange Rate
A regime where a nation's currency price is determined by supply and demand in the foreign exchange market.
Advantages of Floating Exchange Rates
Characteristics include administrative simplicity, quick response to market forces, automatic stabilization, and reduced need for foreign currency reserves.
Disadvantages of Floating Exchange Rates
They can be erratic, fluctuate significantly, and create uncertainties that may reduce trade and investment.
Managed Float
An exchange rate system that allows fluctuation in the open market but with central bank intervention to mitigate negative impacts.
Fixed Exchange Rates
A system often used by developing nations that anchors their currency to a key currency for stability.
Currency Crisis
A situation where doubt exists regarding a central bank's ability to defend a fixed exchange rate, often linked to speculative attacks.
Hedging
A financial strategy used to protect against risks associated with international trade.
Currency Appreciation
When it requires fewer units of a nation's currency to buy a unit of foreign currency, leading to cheaper imports.
Currency Depreciation
When more units of a nation's currency are needed to buy a unit of foreign currency, making foreign goods more expensive.
Speculator
An individual or firm that takes risks to profit in the short term, often by exploiting price differences.
Federal Reserve Dual Mandate
The Federal Reserve's objectives to achieve maximum employment and stable prices.
Open Market Operations
The primary tool of the Federal Reserve for controlling monetary policy, involving the buying and selling of government securities.
Federal Funds Rate
The interest rate at which banks lend reserves to each other; a key tool in monetary policy.
Initial Margin Requirement
The percentage of a security's purchase price that must be covered by the investor's own funds.
Monetary Policy Limitations
Challenges such as timing lags, cyclical asymmetry, and negative supply shocks that complicate effective policy implementation.
Monetary Policy Tools
Tools include traditional methods like open market operations and nontraditional methods like quantitative easing.
Political Independence of the Federal Reserve
The ability of the Federal Reserve to implement monetary policies without political interference.
Taylor Rule
A formula that provides guidelines for setting interest rates based on economic conditions.
Contractionary Monetary Policy
Measures enacted to reduce inflation, often resulting in higher unemployment and recession.
