Money and Exchange Rate Multiple Chapters

Pages: 2 (671 words)  ·  Bibliography Sources: 4  ·  File: .docx  ·  Level: Master's  ·  Topic: Economics

Money & Exchange Rate

There are a number of considerations that a country must take into account when setting monetary and exchange rate policy. The country's exchange rate impacts the price of its export goods on world market and the price of import goods in the domestic market. Relative price is a driver of demand, so the exchange rate drives demand for domestic goods internationally and imported goods locally. Thus, current account is a significant consideration for government when setting monetary and exchange rate policy (Pugel, 2007).

Another consideration is internal issues such as inflation and unemployment. The current account is one of the factors that influences employment. For an economy to reach full employment, the country must have the correct balance of exports and imports. Finding the correct range for the exchange rate can help to facilitate achieving this equilibrium. In addition, the country must consider its own inflation rate. Because monetary policy -- interest rates in particular -- affect the inflation rate, they are often used to moderate inflation in the domestic economy.

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Setting monetary and exchange rate policy must balance the need for the nation to contain inflation and to spur economic growth. The rate of inflation in the economy will not only affect domestic consumption but it will also impact international trade. In addition, if the government views the Phillips Curve to hold true, then the rate of inflation is also tied to the employment level. In setting monetary and exchange rate policy, all of these concerns must be taken into account in order to find the equilibrium point at which employment is maximized and inflation is contained.

Multiple Chapters on Money and Exchange Rate Assignment

If a country chooses a floating rate regime, it must analyze its commitment to that regime. There are political and economic structural factors that need to be in place for a floating rate system to function effectively. These include regulation of the financial system, a commitment to containing inflation and the degree of intervention that the central bank intends to take (Velasco, 2000).… [END OF PREVIEW] . . . READ MORE

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Money and Exchange Rate.  (2010, May 16).  Retrieved January 19, 2021, from https://www.essaytown.com/subjects/paper/money-exchange-rate/20840

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"Money and Exchange Rate."  Essaytown.com.  May 16, 2010.  Accessed January 19, 2021.
https://www.essaytown.com/subjects/paper/money-exchange-rate/20840.