5. Exchange Rate Regimes

i. describe exchange rate regimes;

What is an exchange rate regime? The exchange rate regime is the way a country manages its currency in relation to other currencies and the foreign exchange market.

What is a flexible exchange rate regime? Flexible exchange rate regimes determine exchange rate by the market forces of supply and demand, and therefore fluctuates freely in the market. The central bank intervenes in the foreign exchange market only to smooth temporary imbalances.

What is a fixed exchange rate regime? Fixed exchange rate regimes set the exchange rate at a determined amount by government policy. The distinguishing characteristic of a fixed rate, unified currency regime is the presence of only one central bank with the power to expand and contract the supply of money. Those linking their currency at a fixed rate to the U.S. dollar or the euro are no longer in a position to conduct monetary policy.