fixed exchange rates??? (1 Viewer)

[Goodgirl594]

i was goin over sum notes and i came across this...i dnt really understnd it...so any help would be of great thnx!
"in the case that the fixed exchange rate is above the market equilibrium, the central bank would need to buy the excsess supply created in this situation. other way around wen the fixed rate is below the equilibrium"....
sooo yehhh ..thnx again!

 

[aditya]

It's fixed... its determined by the central bank... not by market forces of supply and demand - this has sertian implications such as covering up the true situation of an economy... but also benifits include decrease speculation.... which can lead to a more stable functioning that is influenced only by economic factors

hope it helps (Y)... there's always the advice line!! =)

 

[i-color]

when you draw your demand and supply graph, an exchange rate above equilibrium means supply is greater than demand, which means you have excess supply.....because the exchange rate will not move with market forces (as aditya explained before), then central bank must buy this excess supply in order for exchange rate to move back to equilbrium, or else it would jsut stay above equilibrium.

 

[Wild Dan Hibiki]

speculation is increased isnt it?

 

[corro]

if its a fixed exchange rate and its not subject to the forces of supply and demand, theres not going to be many speculators willing to buy a currency thats not going to change value . . .

 

[Shuter]

That's right, and creates a more stable dollar value for exports/imports to be more reliable in price.

Though in reality it is not the best way to do things and can often lead to governments going broke.

 

[derek_]

if it's fixed you would probably be looking at being fixed in denominations such as the US currency or TWI