Economics SL

Chapters

Notes

Unit 1 - Intro to Econ & Core Concepts

Unit 2 - Microeconomics

Unit 3 - Macroeconomics

Unit 4 - The Global Economy

Economics SL

Unit 4 - The Global Economy

Understanding Fixed Exchange Rates: How Central Banks Intervene

614 words

4 mins read

Last edited on 5th Nov 2024

Table of content

What is a fixed exchange rate? 🧐

Maintaining the fixed exchange rate 🛠️

How can the central bank keep things balanced? ⚖️

Central bank's options-toolkit 🧰

The downside of high interest rates 😔

What if currency is pushing up? 🚀

Real-world examples 🌍

What is a fixed exchange rate? 🧐

A fixed exchange rate is like setting a price tag on a country's currency against another currency (e.g., USD or Euro).
The UAE Dirham is stuck at AED 3.67 per US$1, like a constant price at your favorite burger joint.
Denmark's kroner is fixed at 7.46 kroner per €1, but it can swing within a 2.25% band like a playground swing! 🎠

Maintaining the fixed exchange rate 🛠️

Imagine a toy store with too many yo-yos. If the central bank is the store owner and the yo-yos are the country's currency, they'd want to clear the excess supply.
If the currency is overflowing (too much supply), the central bank needs to make it desirable like the hottest new video game. 🎮

How can the central bank keep things balanced? ⚖️

Buy the Currency: Just like buying all the extra yo-yos, the central bank can use its foreign cash reserves (like dollars).
Make It Attractive: By increasing interest rates, it makes its own currency attractive like limited-edition sneakers. People will want to invest! 💸
What Happens If Supply Increases? If supply increases, maybe due to more imports (like a sudden craze for foreign toys), there's pressure for the currency to devalue. The central bank must then increase demand, like a mega toy sale to clear stock.

Central bank's options-toolkit 🧰

Option A: Enter the market and start buying currency (like stocking up on rare Pokémon cards).
Option B: Increase interest rates (like offering better rewards for a game's top players).
Option C: Attract foreign investors by making bonds and deposits more attractive (like inviting international players to a local gaming tournament).
Option D: Borrow foreign exchange, though this is like taking a loan for buying a gaming console, not sustainable! 🎮
Option E: Limit imports (like restricting how many candies you buy) or restrict access to foreign exchange (this can lead to "black markets" or secret candy trades).

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Dive deeper and gain exclusive access to premium files of Economics SL. Subscribe now and get closer to that 45 🌟

Economics SL

Unit 4 - The Global Economy

Understanding Fixed Exchange Rates: How Central Banks Intervene

614 words

4 mins read

Last edited on 5th Nov 2024

Table of content

What is a fixed exchange rate? 🧐

Maintaining the fixed exchange rate 🛠️

How can the central bank keep things balanced? ⚖️

Central bank's options-toolkit 🧰

The downside of high interest rates 😔

What if currency is pushing up? 🚀

Real-world examples 🌍

What is a fixed exchange rate? 🧐

A fixed exchange rate is like setting a price tag on a country's currency against another currency (e.g., USD or Euro).
The UAE Dirham is stuck at AED 3.67 per US$1, like a constant price at your favorite burger joint.
Denmark's kroner is fixed at 7.46 kroner per €1, but it can swing within a 2.25% band like a playground swing! 🎠

Maintaining the fixed exchange rate 🛠️

Imagine a toy store with too many yo-yos. If the central bank is the store owner and the yo-yos are the country's currency, they'd want to clear the excess supply.
If the currency is overflowing (too much supply), the central bank needs to make it desirable like the hottest new video game. 🎮

How can the central bank keep things balanced? ⚖️

Buy the Currency: Just like buying all the extra yo-yos, the central bank can use its foreign cash reserves (like dollars).
Make It Attractive: By increasing interest rates, it makes its own currency attractive like limited-edition sneakers. People will want to invest! 💸
What Happens If Supply Increases? If supply increases, maybe due to more imports (like a sudden craze for foreign toys), there's pressure for the currency to devalue. The central bank must then increase demand, like a mega toy sale to clear stock.

Central bank's options-toolkit 🧰

Option A: Enter the market and start buying currency (like stocking up on rare Pokémon cards).
Option B: Increase interest rates (like offering better rewards for a game's top players).
Option C: Attract foreign investors by making bonds and deposits more attractive (like inviting international players to a local gaming tournament).
Option D: Borrow foreign exchange, though this is like taking a loan for buying a gaming console, not sustainable! 🎮
Option E: Limit imports (like restricting how many candies you buy) or restrict access to foreign exchange (this can lead to "black markets" or secret candy trades).

Unlock the Full Content!

Dive deeper and gain exclusive access to premium files of Economics SL. Subscribe now and get closer to that 45 🌟