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Exchange rates
Updated: 4/19/2020
Exchange rates
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Storyboard Text

  • A lot of countries choose to managed rate system over the floating rate system. The question is how do they do that?
  • There are two main methods that allows the devaluation and revaluation of a country's currency:1. Foreign reserves2. Manipulating interest rates
  • Countries use foreign reserves to buy and sell certain currency in order to manipulate the supply of currency in the market
  • For example, one might buy USD with AUD, thereby increasing the supply of AUD in the market
  • There is an important distinction here--a managed rate system is only considered one when the government is consistently intervening with a set range of values it can only accept for its exchange rate. If it does intervene once or twice, it is not considered a managed rate system.
  • This increase in supply for AUD would cause the supply curve to shift right and cause currency to depreciate/devalue.
  • The other way of manipulating exchange rate is through interest rates. If the central bank raises the interest rate, it would entice outside investors to want to invest, as they would get better returns. Due to this, there would be a greater demand for the currency in the country where interest rate has been raised, causing the currency to appreciate/revalue.;
  • Vice-versa happens as well! Now that you know how government can manipulate exchange rates, use this knowledge for your own use!
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