![]() ![]() But suppose, for some unspecified reason, the demand for pounds on the private Forex rises one day to D′ £.įigure 22.1 Central Bank Intervention to Maintain a Fixed Exchange RateĪt the fixed exchange rate ( Ē $/£), private market demand for pounds is now Q 2, whereas supply of pounds is Q 1. In Figure 22.1 "Central Bank Intervention to Maintain a Fixed Exchange Rate", we depict an initial private market Forex equilibrium in which the supply of pounds ( S £) equals demand ( D £) at the fixed exchange rate ( Ē $/£). ![]() Suppose the United States establishes a fixed exchange rate to the British pound at the rate Ē $/£. To see how this works, consider the following example. The central bank can intervene in the private foreign exchange (Forex) market whenever needed by acting as a buyer and seller of currency of last resort. In a fixed exchange rate system, it becomes the responsibility of the central bank to maintain this balance. In a floating exchange rate system, the exchange rate adjusts to maintain the supply and demand balance. However, it is very unlikely that the announced fixed exchange rate will at all times equalize private demand for foreign currency with private supply. However, by fixing the exchange rate the government would have declared illegal any transactions that do not occur at the announced rate. In a fixed exchange rate system, most of the transactions of one currency for another will take place in the private market among individuals, businesses, and international banks. Learn what a central bank must do to maintain a credible fixed exchange rate in a reserve currency system.zip file containing this book to use offline, simply click here. You can browse or download additional books there. More information is available on this project's attribution page.įor more information on the source of this book, or why it is available for free, please see the project's home page. Additionally, per the publisher's request, their name has been removed in some passages. ![]() However, the publisher has asked for the customary Creative Commons attribution to the original publisher, authors, title, and book URI to be removed. Normally, the author and publisher would be credited here. This content was accessible as of December 29, 2012, and it was downloaded then by Andy Schmitz in an effort to preserve the availability of this book. See the license for more details, but that basically means you can share this book as long as you credit the author (but see below), don't make money from it, and do make it available to everyone else under the same terms. This book is licensed under a Creative Commons by-nc-sa 3.0 license. ![]()
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