economics terms

Fixed Exchange Rate

The one clear way to achieve a fixed exchange rate is to adopt a common currency in two countries.  For example, within the U.S., the exchange rate between New York State and California is fixed at 1.00 because both use the same currency.  The euro achieves the same end if the countries involved continue to use that currency.

For two countries with two currencies, maintaining a fixed exchange rate requires at least one of the two countries to pursue some policy to achieve that end.  Simply posting an exchange rate and placing soldiers with rifles at the border to enforce it is possible, but not likely to lead to much economic activity.  A market-based approach is for one of the countries to commit to a monetary policy that targets the exchange rate.  The practical problem is that "fixed" may be true only up to the point where monetary policy is changed to address other targets such as domestic unemployment or inflation.  The Mundell-Fleming Model shows how a government can maintain a fixed exchange rate.

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Economics Terms

Arbitrage Pricing
Arbitrage Profit
Average Cost
Balance of Payments
Budget Constraint
Call Option
Concave Function
Consumer Surplus
Consumption Function
Convex Function
Deadweight Loss
Demand Curve
Economic Agent
Economic Model
Economics Textbook
Endogenous Technical Change
Exchange Rate
Expectations Hypothesis
Federal Funds (Fed Funds) Rate
Fixed Exchange Rate
Floating Exchange Rate
Frictional Unemployment
Gross Domestic Product (GDP)
Income Effect
Income Elasticity
Indifference Curve
Interest Rate
Intertemporal Substitution
Jensen's Inequality
Marginal Cost
Marginal Product
Marginal Utility
Optimizing Behavior
Perfect Competition
Phillips Curve
Price Elasticity
Producer Surplus
Production Function
Production Possibility Frontier
Put Option
Reservation Wage Rate
Risk Aversion
Structural Unemployment
Substitution Effect
Supply Curve
Taylor Rule
Technological Growth
Term Structure
Theory of the Consumer
Theory of the Firm
Unemployment Rate
Utility Function
Velocity of Money
Yield Curve