1. Module Exchange Rate Policy KRUGMAN'S MACROECONOMICS for AP* 43 Margaret Ray and David Anderson

2. What you will learn in this Module : The difference between fixed exchange rates and floating exchange rates Considerations that lead countries to choose different exchange rate regimes http://www.bloomb erg.com/markets/c urrencies/ USDEURJPYGBPCHFCADAUDHKD USD–1.25700.01241.55881.04690.97601.00640.1289 EUR0.7955–0.00991.24010.83310.77620.80050.1025 JPY80.4300101.1100–125.380084.183078.493080.945010.3630 GBP0.64140.80640.0080–0.67140.62600.64560.0827 6/22/12

3. Exchange Rate Policy Governments have more power to influence nominal exchange rates than other prices Exchange rates are important to countries where exports and imports are a large fraction of GDP

4. Exchange Rate Regimes Exchange Rate Regimes Exchange Rate Regime Fixed Exchange Rate Floating Exchange Rate "Managed" & "Target Zone"

5. How Can an Exchange Rate Be Held Fixed? How Can an Exchange Rate Be Held Fixed? Exchange Market Intervention Foreign Exchange Reserves Foreign Exchange Controls

6. The Exchange Rate Regime Dilemma The Exchange Rate Regime Dilemma The Case for Fixed Exchange Rates Facilitates trade by creating certainty about the exchange rate Acts as a check on inflationary policies

7. The Exchange Rate Regime Dilemma The Exchange Rate Regime Dilemma The Case against Fixed Exchange Rates Requires large foreign currency reserves May divert monetary policy Distorts incentives Opportunity for corruption

8. Figure 43.1 Exchange Market Intervention Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition Copyright © 2011 by Worth Publishers