3. Monetary policy is ineffective under fixed exchange system.

With a fixed exchange system

CB gave up an independent monetary policy and they can not use it to target domestic
inflation. Only what they can do is to maintan capital control to prevent traders from buying
or selling domestic currency.
In economics capital principally refers to physical capital – durable goods used in the
production process – machines, factories. This ohysical capital is determined by levels of
investment. Perfect capital mobility would imply no transaction or other costs in moving
capital from one country to another. Capital mobility determines taxes, tarrifs, restriction on
capital flows, rules and government regulations, exchange rate volatility.
If Capital is mobile, then it will be easier to attract Foreign Direct Investment into your
country. It will also increase investment opportunities abroad.
It will be easier to move financial capital around to gain higher interest rates. It means that
changes in interest rates will have a bigger impact on the exchange rate.
It could help equalise incomes between different countries. E.g. with perfect capital mobility,
it may encourage European firms to invest in developing countries who have lower wage
rates. These capital inflows could help raise wages in developing economies

4. When inflation is low unemployment is high and vice versa. As unemployment rises, the
inflation rate will likely fall. This is because:
Higher unemployment will make it harder for unions and workers to bargain for higher
wages. This is because if they ask for higher wages, employers can turn round and say there
are 3 million unemployed people willing to work at lower wages. Therefore, wage inflation is
likely to be muted during the period of rising unemployment. This will reduce cost push
inflation and demand pull inflation.
The higher unemployment is also a reflection of the decline in economic output. Therefore,
firms are seeing an increase in spare capacity and increase in volume goods not sold. In a
recession, there will be greater price competition. Therefore, the lower output will definitely
reduce demand pull inflation in the economy.
Cost Push Inflation
To complicate the issue, inflation can also be caused by cost push factors. For example, an
increase in oil prices could cause a rise in inflation and a rise in unemployment. This is
because higher oil prices push up costs and reduce disposable income. Therefore, due to
cost push factors, the relationship between inflation and unemployment can break down.
However, cost push factors tend to be temporary. There still remains an underlying
relationship between unemployment and inflation.
5. Types of unemployment
There are 3 main types and many more other types of unemployment:

Natural - unemployment that country simply expect to have

Frictional - Frictional unemployment is when workers leave their old jobs but haven't yet
found new ones. Most of the time workers leave voluntarily, either because they need to
move, or they've saved up enough money to allow them to look for a better job.
Frictional unemployment also occurs when students are looking for that first job, or when
mothers are returning to the work force. It also happens when workers are fired or, in some
cases, laid off due to business-specific reasons, such as a plant closure.
It is good for the economy (short term)
Structural unemployment is when shifts occur in the economy that create a mismatch
between the skills workers have and the skills needed by employers.
An example is when an industry fires machinery workers and replaces them with robots. The
workers need to learn how to manage the robots that replaced them. Those that don't need
retraining for other jobs or will face long-term structural unemployment.
A long recession often creates structural unemployment. If workers stay unemployed for too
long, their skills have likely become outdated. Unless they are willing and able to take a
lower-level, unskilled job, they may stay unemployed even when the economy recovers. If
this happens, structural unemployment leads to a higher rate of natural unemployment.

Cyclical unemployment is not part of the natural unemployment rate. It's caused by
the contraction phase of the business cycle. That's when demand for goods and services fall
dramatically, forcing businesses to lay off large numbers of workers to cut costs.
Cyclical unemployment tends to create more unemployment. This is because the laid-off
workers have less money to buy the things they need, further lowering demand.

Long-term unemployment occurs for those actively looking for a job for over 27 weeks.
Seasonal Unemployment
It is part of natural unemployment.
Like its name says, seasonal unemployment results from regular changes in the season.
Workers affected by seasonal unemployment include resort workers, ski instructors and ice
cream vendors. It could also include people who harvest crops. Construction workers are laid
off in the winter, in most parts of the country. School employees can also be considered
seasonal workers.
Classical unemployment is also known as “real wage unemployment” or “induced
unemployment.” It’s when wages are higher than the laws of supply and demand would
normally dictate. It usually occurs in three situations:
Unions negotiate higher salaries and benefits.
Long-term contracts set a wage that has become too high due to a recession.
The government sets a minimum wage that's too high.

Underemployed workers have jobs, but they aren't working to their full capacity or skill
level. This includes those who are working part-time but would prefer full-time jobs and
those who are working in jobs where they aren't being utilized. Underemployment is often
caused by cyclical unemployment.

6. B&H have same value for EURO because B&H is using fixed or pegged exchange rate
system. Bosnian currency is pegged for EURO under fixed rate of 0.51€=1BAM

7. Government stabilization policy Economic stabilization policies are macroeconomic policies

implemented by governments and central banks in an attempt to keep economic growth stable and
less volatile. The two most frequently used stabilization policies are fiscal policy and monetary policy.
Fiscal policy Through fiscal policy, regulators attempt to improve unemployment rates, control
inflation, stabilize business cycles and influence tax rates in an effort to control the economy. Fiscal
policy is largely based on the ideas of British economist John Maynard Keynes (1883–1946), who
believed governments could change economic performance by adjusting tax rates and government
spending. example. One possibility is that the government might decide to increase its own spending
– say, by building more highways. The idea is that the additional government spending creates jobs
and lowers the unemployment rate. Some economists, however, dispute the notion that
governments can create jobs, because government obtains all of its money from taxation – in other
words, from the productive activities of the private sector. Monetary policy Monetary policy is
maintained through actions such as modifying the interest rate, buying or selling government bonds,
and changing the amount of money banks are required to keep in the vault (bank reserves). Broadly,
there are two types of monetary policy, expansionary and contractionary. Expansionary monetary
policy increases the money supply in order to lower unemployment, boost private-sector borrowing
and consumer spending, and stimulate economic growth. Often referred to as "easy monetary
policy," this description applies to many central banks since the 2008 financial crisis, as interest rates
have been low and in many cases near zero. Contractionary monetary policy slows the rate of growth
in the money supply or outright decreases the money supply in order to control inflation; while
sometimes necessary, contractionary monetary policy can slow economic growth, increase
unemployment and depress borrowing and spending by consumers and businesses. An example
would be the Federal Reserve's intervention in the early 1980s: in order to curb inflation of nearly
15%, th
 8. Open market operations Open market operations (OMO) is an economic monetary policy where
central banks purchase or sell bonds or other government securities on the open market in an effort
to regulate the money supply. In other words, the Federal Reserve Bank buys bonds from investors
or sells additional bonds to investors in order to change the number of outstanding government
securities and money available to the economy as a whole.

18. International currency exchange rates display how much one unit of a currency can
be exchanged for another currency. Currency exchange rates can be floating, in which
case they change continually based on a multitude of factors, or they can be pegged (or
fixed) to another currency, in which case they still float, but they move in tandem with the
currency to which they are pegged.

Floating rates are determined by the market forces of supply and demand. How much
demand there is in relation to supply of a currency will determine that currency's value in
relation to another currency. For example, if the demand for U.S. dollars by Europeans
increases, the supply-demand relationship will cause an increase in price of the U.S.
dollar in relation to the euro.

Advantages of fixed and floating exchange rate systems

Advantages of Fixed Exchange Rates

1. Avoid Currency Fluctuations. If the value of currencies fluctuate significantly this can cause
problems for firms engaged in trade.

 For example if a firm is exporting to the US, a rapid appreciation in sterling would make its exports
uncompetitive and therefore may go out of business.
 If a firm relied on imported raw materials a devaluation would increase the costs of imports and
would reduce profitability

2. Stability encourages investment. The uncertainty of exchange rate fluctuations can reduce the
incentive for firms to invest in export capacity. Some Japanese firms have said that the UK’s
reluctance to join the Euro and provide a stable exchange rates maker the UK a less desirable place
to invest.

3. Keep inflation Low. Governments who allow their exchange rate to devalue may cause inflationary
pressures to occur. This is because AD increases, import prices increase and firms have less incentive
to cut costs.

4. A rapid appreciation in the exchange rate will badly effect manufacturing firms who export, this
may also cause a worsening of the current account.
5. Joining a fixed exchange rate may cause inflationary expectations to be lower

Advantages of floating exchange rate

 No need for international management of exchange rates: Unlike fixed exchange rates

based on a metallic standard, floating exchange rates don’t require an international manager

such as the International Monetary Fund to look over current account imbalances. Under the

floating system, if a country has large current account deficits, its currency depreciates.

 No need for frequent central bank intervention: Central banks frequently must intervene in

foreign exchange markets under the fixed exchange rate regime to protect the gold parity,

but such is not the case under the floating regime. Here there’s no parity to uphold.

 No need for elaborate capital flow restrictions: It is difficult to keep the parity intact in a

fixed exchange rate regime while portfolio flows are moving in and out of the country. In a

floating exchange rate regime, the macroeconomic fundamentals of countries affect the

exchange rate in international markets, which, in turn, affect portfolio flows between

countries. Therefore, floating exchange rate regimes enhance market efficiency.

19. Balance of payment is a statement that summarizes an economy’s transactions with the rest of the
world for a specified time period. BOP is also known as a balance of international payments, make all
transactions between a country’s residents and its nonresidents involving goods, services and income
The BOP classifies these transactions in 2 accounts – current account and capital account.The current
account includes transactions in goods, services, investment income and current transfers, while
the capital account mainly includes transactions in financial instruments.