Tag: exchange rates

The article below by William Keegan is a discussion of a recent seminar he attended on ‘Black Wednesday and the rebirth of the British economy’. The seminar led him to consider whether policy makers should be guided mainly by rules or discretion in the development of policy. Many would argue that we have moved away from discretion and moved more towards fiscal and monetary rules for the implementation of policy, but the article discusses the extent to which this may be true.

When the going gets rough, can our rulers rely on the rule book? Observer (18/11/07)


1. Explain, using examples as appropriate, the difference between policies based on fiscal and monetary rules and discretion.
2. Explain how the MPC “largely ignores the cumulative dangers of a high exchange rate” in its determination of interest rates for the UK economy.
3. Discuss how effective the adoption of an inflation target has been in management of the British economy in the past decade.

The article linked to below from the Guardian by Larry Elliott argues that there are significant global imbalances in the world economy and that the IMF has to an extent ignored these imbalances. He argues that the sub-prime mortgage crisis, exchange rate movements and the rapid rise in oil prices are creating significant problems for the world economy.


1. Explain the main global imbalances identified by Larry Elliott in the article.
2. Analyse the likely impact of these imbalances on the global level of economic growth.
3. Explain the statement in the article: “Like many other countries in the region, the lesson China learned from the Asian financial crisis of 1997 was that it needed to build up a war chest of foreign exchange reserves that could be deployed in the event of a speculative attack.”

Hyperinflation in Zimbabwe is no longer news. Indeed the news below that inflation has risen to 2,200% may not even surprise us any more. However, inflation of this level should also mean similar changes in the exchange rate if purchasing power parity is to be maintained. The official exchange rate in Zimbabwe, however, hasn’t changed by anywhere near this amount and there are reports (See Scotsman article below) that the Governor of the Central Bank has even tried to portray a recent devaluation as not really a devaluation at all!

Our mutual friend The Economist (subscription) (12/4/07)
Zimbabwe inflation reaches 2,200% BBC News Online (26/4/07)
Zimbabwe’s inflation rate surges to 231,000,000% Guardian (9/10/08)
A month ago, the hospitals were overflowing. Now they lie empty Guardian (6/12/08)
Hyperinflation in Zimbabwe Wikipedia
How Zimbabwe lost control of inflation Newzimbabwe.com (11/12/09)


1. Explain, using diagrams as appropriate, how hyperinflation will affect the exchange rate in Zimbabwe.
2. Discuss the likely economic impact of not devaluing the official exchange rate in line with the level of inflation in Zimbabwe.
3. Assess possible exchange rate policies that would help reduce the level of hyperinflation in Zimbabwe.

In March 2007, the pound reached a record high against the dollar. This made it an excellent time for UK tourists to visit the USA with prices appearing relatively low thanks to the exchange rate. These exchange rate values also affected the balance of payments of both the USA and the UK and the article below looks at the economic impact of the high exchange rate against the dollar.

Why everything’s almost free in America (and why it won’t last) Guardian


1. Explain the principal reasons for the change that has taken place in the exchange rate in recent years.
2. “On a PPP basis, a pound should buy $1.60”. Explain what is meant by this statement.
3. “My bet is that within a year the rate will be closer to $1.60 than $2. Maybe a lot closer.” Assess the impact of this possible outcome on economic growth and inflation in the UK.
4. Examine the likely impact of the high exchange rate on the balance of payments situation of (a) the USA and (b) the UK.

Since the 1970s and 1980s we have moved away from an active exchange rate policy as part of an overall demand management strategy. Indeed, by the mid 2000s, even the role of fiscal policy in demand management had diminished. The article below looks at these changes and considers whether this new approach to demand management is proving effective.

It’s a fashionable club but can the MPC keep us out of the rough? Guardian (11/2/07)


1. Explain how the approach to management of the economy has changed over the last three decades.
2. Assess the problems that might arise from trying to manage the economy using just one policy instrument (i.e. interest rates)..
3. Explain what is meant by an exchange rate policy. Discuss whether the reintroduction of an exchange rate policy would help with the management of the economy.