EC202 1nd Edition Lecture 39Outline of Last Lecture I. ReevaluationII. DevaluationIII. Exchange ratesIV. International reserves V. Speculative attacksOutline of Current Lecture II. Fixed exchange ratesIII. Stabilization monetary policyCurrent Lecture-fixed exchange rates-No way to maintain a fixed exchange rate above its fundamental value for extended periods-Changing the fundamental value will eliminate the overvaluation problem-One way to change the fundamental value is to increase the return from domestic assets-Tighter monetary policy increases real rates-Policies increasing a nation’s growth rate increases attractiveness of domestic assets -Increasing demand for domestic currency raises the fundamental value-Monetary policy can be used to keep the fundamental value of the exchange rate equal to the official value-However, then monetary policy is no longer available for stabilizing the domestic economyThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.-Suppose there is a recession due to insufficient demand and, at the same time, the exchange rate is overvalued-To solve the recession-Central bank could lower real interest rate to increase spending and output-To solve the overvaluation-Central bank could raise the real interest rate-Monetary policy cannot solve both problems at
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