Question

In: Economics

What are three benefits to a fixed exchange rate? How do these benefits apply to the...

What are three benefits to a fixed exchange rate? How do these benefits apply to the Euro? Besides a fixed exchange rate, what tools exist for a government that lacks credibility in terms of inflation? What is the case for going beyond fixed exchange rates and adopting a common currency?

Solutions

Expert Solution

BENEFITS

1)AVOID CURRENCY FLUCTUATIONS

2)ENCOURAGES FIRMS TO INVEST

3)INCENTIVE TO KEEP INFLATION LOW

FIXED EXCHANGE RATES PROVIDE GREATER CERTAINITY FOR EXPORTERS AND IMPORTERS, AND HELP THE GOVERNMENT MAINTAIN LOW INFLATION

THE BEST REMEDY FOR FIGHTING INFLATION IS TO REDUCE THE AGGREGATE SPENDING. MONETARY POLICY CAN HELP IN REDUCING THE PRESSURE OF DEMAND.DURING INFLATION THE CENTRAL BANK CAN RISE THE COST OF BURROWING AND REDUCE THE CREDIT CREATING CAPACITY OF COMMERCIAL BANKS.WHEN THESE MEASURES ARE IGNORED BY THE GOVERNMENT., THERE IS NO ALTERNATIVE TO COP WITH INFLATION. THE CREDIT CREATION CAN BE DONE IN TWO WAYS 1) OPEN MARKET OPERATION,2)SELECTIVE CREDIT CONTROL. APART FROM THE MONETARY MEASURES FISCAL MEASURES CAN ALSO ADOPTED BY THE GOVERNMENT.FISCAL MEASURES CONSIST IN 1)REDUCTION OF GOVERNMENT SPENDING ,2) IMPOSITION OF NEW TAXES,3)PROMOTING COMPULSARY SAVING4)GOLD STERILIZATION,4) OVER VALUING DOMESTIC CURRENCY IN TERMS OF FOREIGN CURRENCIES .


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