Study Notes
Fixed and managed float exchange rates involve government or central bank intervention to maintain currency values. In a fixed exchange rate system, the exchange rate is set at a predetermined level by the government or central bank. Example: The central bank buys or sells currency to maintain the rate.
- Managed exchange rate — also known as a managed float, allows the currency to float freely but with periodic intervention to stabilize it. Example: Central bank intervenes to prevent large fluctuations.
- Revaluation — an increase in the value of a currency in a fixed exchange rate system. Example: Government sets a new, higher exchange rate.
- Devaluation — a decrease in the value of a currency in a fixed exchange rate system. Example: Government sets a new, lower exchange rate.
- Overvalued currency — when a currency's value is higher than the market rate. Example: Makes imports cheaper but exports less competitive.
- Undervalued currency — when a currency's value is lower than the market rate. Example: Makes exports more competitive but imports more expensive.
Exam Tips
Key Definitions to Remember
- Fixed exchange rate
- Managed exchange rate
- Revaluation
- Devaluation
- Overvalued currency
- Undervalued currency
Common Confusions
- Confusing fixed exchange rates with managed exchange rates
- Misunderstanding the difference between revaluation and appreciation
Typical Exam Questions
- What is a fixed exchange rate system? A system where the exchange rate is set by the government or central bank.
- How does a managed exchange rate differ from a fixed exchange rate? It allows for free floating with periodic interventions.
- What are the effects of an overvalued currency? Cheaper imports but less competitive exports.
What Examiners Usually Test
- Understanding of how fixed exchange rates are maintained
- Differences between fixed and managed exchange rate systems
- Impacts of overvalued and undervalued currencies