KU Business Discussion – Description
The question of fixed exchange rates. Fixed exchange rates are a thing of the past. Brigham and Ehrhardt (2022) argue that today, many countries’ currencies can create floating exchange rates, meaning that a change in demand changes the exchange rate. Many factors can impact an exchange rate. Currencies can appreciate, worth more than it previously was, or depreciate, worth less than it previously was. Additionally, considering that globalized companies that operate or manufacture in different countries must deal with the different changes in currency exchange rates, these companies risk an exchange rate, as exchange rates cannot so accurately be predicted. Brigham and Ehrhardt (2022) believe the fixed exchange rate regime of 1945–1973 failed because of widely diverging national monetary and fiscal policies, differential inflation rates, and various unexpected external shocks. The U.S. dollar was the main reserve currency held by central banks and was the key to the web of exchange rate values. The United States ran persistent and growing deficits in its balance of payments, which required a heavy outflow of dollars to finance the deficits. Eventually, the heavy overhang of dollars held by foreigners forced the United States to devalue the dollar, because it could no longer guarantee the conversion of dollars into its diminishing store of gold. Are floating exchange rates subjected to IMF intervention before the 1971 IMF rules?
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