Exchange Rates

Overview

Countries issue currency as a medium of exhange for its products. (see money) When a citizen of one country wants to purchase a good produced in another country, she must purchase it using the currency of the country that produced the good. In order to do this, she goes to the market and purchases the currency that she needs with currency from her own country. The number of units of one currency that one can purchase with one unit of ones own currency is the rate of exchange.

Currency Regimes

• Floating - a country issues a currency and lets the free market determine the exchange rate
• Fixed - a country issues a currency and guarantees a fixed price for the currency in terms of another currency. Requires the issuing country to intervene in the markets
• Currency Union - a group of countries join together to create a shared currency
• Currency Board - a currency is backed by another currency.