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Chapter 18 (7)
Fixed Exchange Rates and
Foreign Exchange Intervention
◼ Chapter Organization
Why Study Fixed Exchange Rates?
Central Bank Intervention and the Money Supply
The Central Bank Balance Sheet and the Money Supply
Foreign Exchange Intervention and the Money Supply
Sterilization
The Balance of Payments and the Money Supply
How the Central Bank Fixes the Exchange Rate
Foreign Exchange Market Equilibrium under a Fixed Exchange Rate
Money Market Equilibrium under a Fixed Exchange Rate
A Diagrammatic Analysis
Stabilization Policies with a Fixed Exchange Rate
Monetary Policy
Fiscal Policy
Changes in the Exchange Rate
Adjustment to Fiscal Policy and Exchange Rate Changes
Balance of Payments Crises and Capital Flight
Managed Floating and Sterilized Intervention
Perfect Asset Substitutability and the Ineffectiveness of Sterilized Intervention
Case Study: Can Markets Attack a Strong Currency? The Case of Switzerland
Foreign Exchange Market Equilibrium under Imperfect Asset Substitutability
The Effects of Sterilized Intervention with Imperfect Asset Substitutability
Evidence on the Effects of Sterilized Intervention
Reserve Currencies in the World Monetary System
The Mechanics of a Reserve Currency Standard
The Asymmetric Position of the Reserve Center
© 2015 Pearson Education, Inc.
7. The reason that the effects of temporary and permanent fiscal expansions differ under floating
exchange rates is that a temporary policy has no effect on the expected exchange rate while a
permanent policy does. The AA curve shifts with a change in the expected exchange rate. In terms
8. By expanding output, a devaluation automatically raises private saving because part of any increase
in output is saved. Government tax receipts rise with output, so the budget deficit is likely to decline,
9. An import tariff raises the price of imports to domestic consumers and shifts consumption from
imports to domestically produced goods. This causes an outward shift in the DD curve, increasing
© 2015 Pearson Education, Inc.
18. Consider an example where France sells domestic assets (DA) for gold. If other central banks want
19. When a country devalues against the reserve currency, the value of its reserves in foreign currency
20. An economy caught in a liquidity trap has an AA curve with a flat section at output levels far
