How does balance of payments impct on domestic $ supply?? (1 Viewer)

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Hey peeps,

i'm currently learning about exchange rates. but in the tim riley book, i've come across this concept:

"under a fixed change rate, the balance of payment impacts the domestic money supply, whereas, under a flexible exchange rate, balance of payment does NOT impact on the domestic money supply"....... can someone provide an example for me? or explain what the hell this is about? its so frustrating...and my teacher said she'll tell me of it later..but my exams are coming up! humph!

and something else too...is there a difference between a fixed and a pegged exchange rate? my teacher said no. Then why is there flexible, fixed AND pegged exchange rate individually mentioned in my textbook...?!#R#$&%*( i'm going insane....

 

[Ednaw]

a) pritty much, under a fixed exchange rate the RBA or Gov decide on the exchange rate and ask for all traded money to be lodged with them....They have foreign currency reserves and by either buying or selling the Australian dollar they are able to manipulate the exchange rate. This means that they have control of the amount of $A bought and sold (Supply of $A). However i dont seem to have learnt about this being domestic but more on the forex mkts. But i suppose it could be considered domestic if you say they can limit the amount of foreign currency traded (control of the amount $US traded with $A for example) then i suppose you can say they control the domestic supply of foreign currency under the fixed Xchange sys.

b) Fixed and pegged differ in that fixed was done weekly i think (Sundays if memory serves me right) and pegged was at 9am each morning....


Yeh thats my rant, hope its understandable >.<

 

[pete_mate]

im using bulmer, explains it perfectly

with a fixed exchange rate there is an excess of supply or demand because the price is fixed above or below the market equilibrium.
therefore, this impacts on domestic supply beacause the RBA must provide for this differance via its foreign reserves (buying or selling it, demanding or supplying)

by a flexible exchange rate is already at equilibrium point so it doesnt need foreign reserves

 

[Rekkusu]

Yeah.. basically thats the main reason as China's fixed exchange rate, all they need to do is buy the excess supply to keep it low, or vice versa.

" fixed and a pegged exchange rate?"

Fixed is just meaning its fixed at say US 75 cents. Pegged is where the bank of that country says, I'll let our exchange rate be like this at 9am, but let it float between 75 US cents and 82 US cents.

 

[Mandy101]

A fixed exchange rate is set for LONG periods of time, whereas a pegged exchange rate is normally set for SHORT periods of time (a week, a month)

 

[keevinl]

Just slightly off topic, but does the syllabus require an in-depth knowledge of fixed exchange rates and their relation to the economy?

 

[gibbo67]

Just slightly off topic, but does the syllabus require an in-depth knowledge of fixed exchange rates and their relation to the economy?

you're gonna need to know a bit about the differing methods of currency valuation, especially if you are asked to compare and contrast with the floating and pegged exchange - though more likely you'll get asked this question in the short answer section of the HSC paper