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why do nations need a system of currency exchange

Questions 5. 2
in year to December 2017. Regulators find leading model agencies guilty of price fixing. How currency values are established depends upon whether they are determined solely in free markets, called freely floating, or determined by agreements between governments, called fixed or pegged. Like most currencies, the pound has at times been both fixed, and floating. Between 1944 and 1971, most of the worldБs currencies were fixed to the US Dollar, which in turn was fixed to gold. After a period of floating, the pound joined the European Exchange Rate Mechanism (ERM) in 1990, but quickly left in 1992, and has floated freely ever since. This has meant that its value is largely determined by the interaction of demand and supply. The demand for currencies is derived from the demand for a countryБs exports, and from speculators looking to make a profit on changes in currency values. The supply of a currency is determined by the domestic demand for imports from abroad. For example, when the UK imports cars from Japan it must pay in yen (б), and to buy yen it must sell (supply) pounds. The more it imports the greater the supply of pounds onto the foreign exchange market.

A large proportion of short-term trade in currencies is by dealers who work for financial institutions. The London foreign exchange market is the WorldБs single largest international exchange market. The equilibrium exchange rate is the rate which equates demand and supply for a particular currency against another currency. If we assume the UK and France both produce goods that the other wants, they will wish to trade with each other. However, French producers require payment in Euros and the British producers require payments in pounds Sterling. Both need payment in their own local currency so that they can pay their own production costs in their local currency. The foreign exchange market enables both French and British producers to exchange currencies so that trades can take place. The market will create an equilibrium exchange rate for each currency, which will exist where demand and supply of currencies equates. Changes in the value of a currency like Sterling reflect changes in demand and supply. On a demand and supply graph, the price of Sterling is expressed in terms of the other currency, such as the $US. For example, an increase in exports would shift the demand curve for Sterling to the right and push up the exchange rate.

Originally, one pound bought $1. 50, but now buys $1. 60, hence its value has risen. Changes in a countryБs interest rates also affect its currency, through its impact on the demand and supply of financial assets in the UK and abroad. For example, higher interest rates relative to other countries, makes the UK attractive the investors, and leads to an increase in the demand for the UKБs financial assets, and an increase in the demand for Sterling. Conversely, lower interest rates in one country relative to other countries leads to an increase in supply, as speculators sell a currency in order to buy currencies associated with rising interest rates. These speculative flows are called hot money, and have an important short-term effect on exchange rates. Report on the growth of alternative finance. steady at 3. 0%. Costs and benefits of customs unions. Multiple choice papers for Paper Three.

Mrs May's What are available to the UK? Savings ratio falls to lowest level on record. - and a Dutch Sandwich The presents its final package for reform of international tax rules. There are economists who think that in most circumstances, floating exchange rates are preferable to. As floating exchange rates automatically adjust, they enable a country to dampen the impact of and foreign, and to preempt the possibility of having a. However, they also engender unpredictability as the result of their dynamism. However, in certain situations, fixed exchange rates may be preferable for their greater stability and certainty. That may not necessarily be true, considering the results of countries that attempt to keep the prices of their currency "strong" or "high" relative to others, such as the UK or the Southeast Asia countries before the. The debate of making a choice between fixed and floating exchange rate regimes is set forth by the, which argues that an economy (or the government) cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy.

It must choose any two for control and leave the other to market forces. The primary argument for a floating exchange rate is that it allows monetary policies to be useful for other purposes. Under fixed rates, monetary policy is committed to the single goal of maintaining exchange rate at its announced level. Yet the exchange rate is only one of the many macroeconomic variables that monetary policy can influence. A system of floating exchange rates leaves monetary policy makers free to pursue other goals such as stabilizing employment or prices. In cases of extreme or, a will normally intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a. A central bank might, for instance, allow a currency price to float freely between an upper and lower bound, a price "ceiling" and "floor". Management by the central bank may take the form of buying or selling large lots in order to provide price support or resistance or, in the case of some national currencies, there may be legal penalties for trading outside these bounds.

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