Essays on Exchange Rates and Fiscal Requirements for Price Stability Case Study

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The paper “ Exchange Rates and Fiscal Requirements for Price Stability” is a forceful variant of the case study on finance & accounting. From a fiscal point of view, it is critical to understand how exchange-rate shifts influence economic decisions and operations. The essay first describes the exchange rates, factors affecting the exchange rate, and their link to goods and services produced (Woodford, 2001). Exchange rateThe exchange rate is defined as the price of one currency in terms of another currency,   for instance, a United. States company is purchasing 150,000 pounds worth of compact discs from Britain.

The exchange rate being at $2 = £ 1, so the American purchaser must exchange its $400,000 for £ 200,000 at an American financial institution. The American financial institution will give up its £ 200,000 in the London bank to the importer, who will pay the British compact discs exporter, who will deposit the money in the exporter's bank. Depreciation means the value of a currency has fallen; thus it takes more units of that country's currency to buy another country's currency (Woodford, 2001). Appreciation means the value of a currency or its purchasing power has risen; since it takes less of that currency to buy another country's currency. Types of Exchange ratesInternational Exchange Rate Systems - provided for fixed exchange rates in terms of a certain amount of currency for an ounce of gold.

Flexible Exchange Rates - rates are determined by the forces of demand and supply. Fixed Exchange Rates - are those that are pegged to some set value, such as gold. Floating Exchange Rate - these are rates that are determined by foreign - market demand and supply of the currency in relation to other currencies (Sanger, 2005). Exchange rates and their modes of determination. Changes in preferences for a country's products would shift the demand for the currency.

The relative income changes cause changes in the demand and supply of currencies. Rising incomes increase the demand for imports, which increases the supply of that country's currency and the demand for other country's currencies. The relative price changes will cause changes in the demand and supply of currencies.

References

European Central Bank (2010) Euro Exchange Rates in USD. Retrieved 3 May 2010. Available at: http://www.ecb.int/stats/exchange/eurofxref/html/eurofxref-graph-usd

Woodford, M. (2001) “Fiscal requirements for price stability”, Journal of Money Credit and Banking, Vol. 33, No. 3 pp.669-727

Calvo, G., and Reinhart, C. (2002). "Fear of Floating." Quarterly Journal of Economics, 117: 379-408.

Levy-Yeyati, E. and F. Sturzenegger (2004). "Classifying Exchange Rate Regimes: Deeds vs. Words." European Economic Review.

Ernest, R. & Bulent, U. (1996). International Journal of Social Economics. [Online]. 23(7) pp. 49-56 [Accessed 7th April 2010]. Available at:

British Broadcasting Corporation (BBC) News (2009) Timeline: Credit Crunch to Downturn: [online]. UK: BBC News. [Accessed 15th February 2010]. Available at: http://news.bbc.co.uk/2/hi/7521250.stm#table.

Articlesbase (2008) The Strength of the US Economy. Retrieved 3 May 2010. Available at: http://www.articlesbase.com/finance-articles/the-us-economy-strength-671005.html

Evans, E.A (2009). Understanding Exchange Rates: A Weakening U.S Dollar. Retrieved 3 May 2010. Available at: http://edis.ifas.ufl.edu/fe546

Chipello, C. 2004. Dollars Slide Leaves Global Impact. The Wall Street Journal. Wednesday, December 29.

Sanger, D. 2005. U.S. Faces More Tension Abroad as Dollar Slides. The New York Times, January 25.

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