Topics: Foreign exchange market, United States dollar / Pages: 24 (6835 words) / Published: Sep 20th, 2014
Chapter 6

Government Influence on Exchange Rates

Lecture Outline

Exchange Rate Systems Fixed Exchange Rate System Freely Floating Exchange Rate System Managed Float Exchange Rate System Pegged Exchange Rate System Dollarization Classification of Exchange Rate Arrangements

A Single European Currency Impact on European Monetary Policy Impact on the Valuation of Businesses in Europe Impact on Financial Flows Impact on Exchange Rate Risk Status Report on the Euro

Government Intervention Reasons for Government Intervention Direct Intervention Indirect Intervention

Intervention as a Policy Tool Influence of a Weak Currency on the Economy Influence of a Strong Currency on the Economy

Chapter Theme

This chapter introduces the various exchange rate systems. In addition, it stresses the manner by which governments can influence exchange rates. Since exchange rate move­ments are critical to an MNC’s performance, and the government has much influence over these exchange rates, the MNC is affected by government intervention.

Topics to Stimulate Class Discussion

1. If you were elected to choose between a fixed, freely floating, or a dirty float exchange rate system, which would you choose for your home country? Why?

a. Assume that both the U.S. and Europe experience high unemployment. How can the U.S. central bank attempt to adjust the dollar value to reduce this problem? Is the European central bank likely to go along with the U.S. central bank’s strategy or retaliate? Why?

Should China Be Forced to Alter the Value of Its Currency?

POINT: U.S. politicians frequently suggest that China needs to increase the value of the Chinese yuan against the U.S. dollar, even since China has allowed the yuan to float (within boundaries). The U.S. politicians claim that the yuan is the cause of the large U.S. trade deficit with China. This issue is periodically raised not only

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