Exchange Rates, Please please help

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vonny101
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#1
Report Thread starter 8 years ago
#1
Hey guys, really unclear about exchange rates. I have a few simple questions which I'm too embarressed to ask my teacher about.

1) If the UK pegs the £pound to Spain's €Euro does this mean it has pegged the £pound to the €Euro as the whole? Can the UK just peg the pound to the spa ins euro or does it have to peg the pound to the entire euro?

2) How does the fixed exchange rate system work? on a simple level could someone please help me i really don't wanna fail F585
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zedeneye1
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#2
Report 8 years ago
#2
(Original post by vonny101)
Hey guys, really unclear about exchange rates. I have a few simple questions which I'm too embarressed to ask my teacher about.

1) If the UK pegs the £pound to Spain's €Euro does this mean it has pegged the £pound to the €Euro as the whole? Can the UK just peg the pound to the spa ins euro or does it have to peg the pound to the entire euro?

2) How does the fixed exchange rate system work? on a simple level could someone please help me i really don't wanna fail F585
uh dude, they all share a common euro, the "french" euro is not different from the german or spanish euro...Unless I'm living under a rock.
And if I'm not wrong, uk did once peg pound to euro years ago....(????)

Like China. They don't let the currency trade freely. Government controls all foreign currency trading. So in such a country, if I wanted to buy USD with my what ever local currency, I'd need some approvals (in a very very strict country)....And I would only be able to buy or sell at government approved currency rates. Or the government would regularly interfere in the open market to keep currency rates where it wants (less strict than the previous type I just said).
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samboJ
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#3
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#3
(Original post by vonny101)
Hey guys, really unclear about exchange rates. I have a few simple questions which I'm too embarressed to ask my teacher about.

1) If the UK pegs the £pound to Spain's €Euro does this mean it has pegged the £pound to the €Euro as the whole? Can the UK just peg the pound to the spa ins euro or does it have to peg the pound to the entire euro?

2) How does the fixed exchange rate system work? on a simple level could someone please help me i really don't wanna fail F585
1. Yes.
2. Buys Euro when pound is too strong, sells Euro when pound is weak. NOT an automated system (otherwise speculation could wreck the system). eg. China fixes Renmibi against USD at a rate of 8:1 so it can keep it's exports artificially cheap and therefore sells higher volume across globe so it has high balance of trade surplus which contributes to its average GDP growth of 10% per year over the last 30 years.
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ddrrzzeerr
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#4
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#4
(Original post by zedeneye1)
And if I'm not wrong, uk did once peg pound to euro years ago....(????)
No, it pegged it to the Deutsche Mark in the 90s but never the euro.
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vonny101
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#5
Report Thread starter 8 years ago
#5
Cheers guys

Much clearer now!
Is anyone doing F585 this year (2014)? OCR
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PaulKrugman
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#6
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#6
(Original post by Sternumator)
No, it pegged it to the Deutsche Mark in the 90s but never the euro.
Yeah the euro ERM, http://en.wikipedia.org/wiki/Europea...Rate_Mechanism beauitful reading (and the fight between the BoE and George Soros) for anyone interested in wider reading.
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zedeneye1
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#7
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(Original post by Sternumator)
No, it pegged it to the Deutsche Mark in the 90s but never the euro.
similar thing...had a different name back then.
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RowanL
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#8
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(Original post by zedeneye1)
similar thing...had a different name back then.
Well no it's not a similar thing. The treasury pegged the pound to the Deutsche Mark which was the Germany currency. This is not similar to the euro because the euro is a shared currency across European member states.
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zedeneye1
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#9
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#9
(Original post by RowanL)
Well no it's not a similar thing. The treasury pegged the pound to the Deutsche Mark which was the Germany currency. This is not similar to the euro because the euro is a shared currency across European member states.
ERM 1 failed for same reasons euro seems to be "failing". That was my point. Central banking across such a huge area with such economic diversity doesn't seem to suit all the member states.

I think you should read this :

http://en.wikipedia.org/wiki/Europea...Rate_Mechanism

pegging different currencies to each other and using a common currency is almost the same thing.

You might argue that in pegging currencies, the nations have control over monetary policy, but you're kind of wrong. If they play with the interest rates, the exchange rate will fluctuate and if they go out of range, they're out of the "union". That's what happened to UK, they couldn't keep the exchange rate where they were required. It was costing them more money than the benefit they would get from a pegged currency. So it had to leave. Similar reason why UK still doesn't want to get into euro. And its a valid point.

The problem with unified currency is that if you're doing better than the others, your progress is hindered due to the weaker economies. But the advantage is, if you fall, they're there to help you.
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IanBaxter95
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#10
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#10
With the coming together of countries to form a single currency, different economies will be effected in different ways. Depending on how large and prosperous the economy is, the new currency could be overvalued or undervalued against other currencies such and the pound or the dollar.
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RowanL
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#11
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#11
(Original post by zedeneye1)
ERM 1 failed for same reasons euro seems to be "failing". That was my point. Central banking across such a huge area with such economic diversity doesn't seem to suit all the member states.

I think you should read this :

http://en.wikipedia.org/wiki/Europea...Rate_Mechanism

pegging different currencies to each other and using a common currency is almost the same thing.

You might argue that in pegging currencies, the nations have control over monetary policy, but you're kind of wrong. If they play with the interest rates, the exchange rate will fluctuate and if they go out of range, they're out of the "union". That's what happened to UK, they couldn't keep the exchange rate where they were required. It was costing them more money than the benefit they would get from a pegged currency. So it had to leave. Similar reason why UK still doesn't want to get into euro. And its a valid point.

The problem with unified currency is that if you're doing better than the others, your progress is hindered due to the weaker economies. But the advantage is, if you fall, they're there to help you.
I see your general point about pegged currencies and a currency union behaving in similar ways and if that was all you meant to say then that is true, though the ties are much weaker with a peg and the fallout of leaving a currency union would likely be much worse. However what you implied was that the Deutsche Mark and the Euro were the same thing under different names which is certainly not the case.
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