Government Influence on Interest Rates

03762321
IFM

Government Influence
on
Exchange Rates

,Learning Objectives
L O 1: Describe the exchange rate systems used by various governments.

L O 2: Explain how governments can use direct intervention to influence exchange
rates.

L O 3: Explain how governments can use indirect intervention to influence exchange
rates.

,Exchange Rate Systems
Exchange rate systems can be classified according to the ‘degree of government
control’ and into 4 categories:

 Fixed

 Freely floating

 Managed float

 Pegged

, Exchange Rate Systems
Fixed Exchange Rate System
 Exchange rates are either held constant or allowed to fluctuate only within very
narrow boundaries.

 If an exchange rate begins to move too much, the government can intervene to
maintain it within the boundaries.

 Central bank can reset a fixed exchange rate by devaluing or reducing the value of
the currency against other currencies (Devaluation – downward adjustment).

 Central bank can also revalue or increase the value of its currency against other
currencies (Revaluation – upward adjustment).