Exchange Rates

How Governments maintain and Manage Fixed and Manage

Floating Currency:
1. Official Reserve Currency
2. Limit Imports: helps limit the Supply of domestic
currency in the Marketplace.
3. Monetary Policy (Central Bank)
a. Increase Supply of Money Decrease Interest Rate
Depreciate Domestic Currency
b. Decrease Supply of Money Increase Interest Rate
Appreciate Domestic Currency
4. Fiscal Policy (Government Intervention)
a. Protectionist Trade Policy to limit imports
Decreases Supply of Domestic Currency to the
Market Appreciates Domestic Currency
b. Exchange Controls Government restricting the
ability of Citizens from exchanging currency
(Supplying Domestic Currency) slows the
Depreciation of Domestic Currency.
Practice situations:
Government of Saudi Arabia pegs the Riyal to the US Dollar
($) at a rate of:
4.50 Riyal = $1
The Riyal exchange rate changes from the peg rate of 4.50
Riyal = $1 to 5 Riyal = $1.
1. Does this represent an appreciation or depreciation
of the Riyal?
2. Since the Saudi Arabian Government pegs the Riyal to
the US $, the Government must intervene to reach the
pegged rate of 4.50 Riyal = $1.
a. Explain at least 2 reasons why the Riyal to US ($)
exchange rate changed.
b. What actions can the Government take to maintain
the peg? Explain and justify at least 3
Government/Central Bank actions.

Exchange Rates
The Riyal exchange rate changes from the peg rate of 4.50
Riyal = $1 to 3.5 Riyal = $1.
1. Does this represent an appreciation or depreciation
of the Riyal?
2. Since the Saudi Arabian Government pegs the Riyal to
the US $, the Government must intervene to reach the
pegged rate of 4.50 Riyal = $1.
a. Explain at least 2 reasons why the Riyal to US ($)
exchange rate changed.
b. What actions can the Government take to maintain
the peg? Explain and justify at least 3
Government/Central Bank actions.