TOPIC 1 INTRODUCTION TO MACROECONOMICS 4.1.4 DEFINITION OF MACROECONOMICS Macroeconomics is the overall study of a country’s economic actives and main economic ‘sectors. In other words, macroeconomics is a field of social science that studies the aggregate behavior ‘of the entire economy. Macroeconomics is also known as the theory of income determination. 4.4.2 COMPARISON BETWEEN MACROECONOMICS AND MICROECONOMICS WICROECONOMICS ‘Studies individual or household income: MACROECONOMICS, “Studies national income ‘Analyzes demand for and supply of labour in a particular industry ‘Analyzes total employment (overall) in the economy ‘Deals with households’ and fms’ decisions ‘Deals with aggregate decisions: ‘Studies individual prices ‘Studies overal price level “Fnalyzes demand and supply of goods ‘Analyzes aggregate demand and aggregate Supply Notes : Aggregate refers to the sum total of the behavior of all individuals in th ynomy. 4.4.3 MACROECONOMICS GOALS WACROECONOMICS GOALS Full Employment Ts achieving ful employment of all available factors of production (labour, land, capital and entrepreneurs). ‘An economy should use all its available resources more efficiently to attain maximum output I more resources are employed, the higher the output of goods and services, ‘When there is unemployment, it means that an available resource is not being used. This indicates inefficiency and a waste of resources. Full employment does not mean that 100 per cent ofthe labour force is employed. This is because there are always some people who are voluntarily unemployed as a result of being unsatisfied with their ‘current job and resigning to find another job. ‘The unemployment rate in the labour market shows a percentage of the labour force who are out of employment and who are seeking ‘employment. $$ Scanned with CamScannerae Price Stability | The objective of the nation is to keep its inflation rate as low as (Control ination) | possibie. Inflation acours when there is an increase in the overall price level (based on average prices). Inflation can reduce the purchasing power of consumers. The ‘quant of goods and services purchased wil be less if inflaon is high. Inflation can lead to income not rising as fast as prices, thereby penalizing certain groups of people, namely pensioners and fred income eamers. Economic Growth | Economy growth refers to an increase in the ful production ouput level ofa nation overtime. ‘The economy must be operating at maximum capacity Economic growth cen only be realized over the years However, the economic growth of a nation does not move Constantly but wil experience short-term ups and downs (business cycle — four phases: peak, recession, trough and recovery) Economie growth measure by evaluating the full production ouput per capita. Ifthe growth rate of output is greater than the growth Tate ofthe population, it shows an increase in the amount of goods ‘and services produced per person (on average, people would be better off) Equitable ‘Most the nations try fo narrow the gap between the higher income Distbution Of | and the lower income groups. This is to ensure that all peope are Income equal in terms ofthe standard of living. Disparities in income will creat socal fiction and tring about many problems. Taxation is one method of achieving an equiable ditrbuton of income, When taxes are imposed, the higher income groups pay a higher tax to the government ‘An expenditure poi narows the gaps between the two income groups. Through tis policy, income is more evenly dstbutd with the government providing subsidies, making transfer payments end providing education scholarship forthe lower income group. 4.1.6 THE CONFLICTING MACROECONOMIC GOALS To achieve full employment and maintain price stability. To achiove economic growth and a equilibrium in balance of payments. To achieve economic growth and maintain price stabil —# Scanned with CamScanner4.2.4 DEFINITION AGGREGATE DEMAND AND AGGREGATE SUPPLY Aggregate Demand: Refers tothe total quantity of output demanded at alternative price levels during @ given period of time, ceteris parbus. Aggregate Supply: Refers to the total quantity of output supplied at alternative price levels during a given period of ime, ceteris paribus. 4.2.2 AGGREGATE DEMAND AND AGGREGATE SUPPLY CURVE IN MARKET EQUILIBRIUM 1.23 FACTORS THAT SHIFT THE AD CURVE AND AS CURVE ‘AD CURVE ‘Consumption Expenditures (C) * Consumption are usually connected to households. + Factors influence are based on the consumers’ wealth, consumer expectations, household debts and taxes, Investment Expenditures (I) + Investment Expenditure are usually incurred by firms. + Changes in investment can be caused by interest rates, expected returns from investment projects, business taxes, the love of excess capacity and technology Government Purchases (6) + If government increases its expenses in providing infrastructure, the AD curve will shift to the right, + If.government decrease its expenses, then the AD curve will shift tothe left. Scanned with CamScannerNot exports (XM) ‘+ The changes in exports connected tothe movements of the AD curve are influenced by factors olher than rice namely Foreign Income and Foreign Currency Exchange rato, +The fin net exports will shift ofthe AD curve to the right AS CURVE Costs of Production «When there is a lower costs of production due o lower wage rates or lower ol pices resu in fms being abe to produce a higher quanti of goods and services. + Therefore, the aggregate supply curve wil shit othe rg Economic Growth * Economic growth is normaly determined with a larger labor force. The more productive the labor force and eficint use of capital, wil the production goods and services. + Tithe quanity of eal GDP supplied wil shit the egaregate supply curve fo the ight 1.3.4 INDUSTRIAL REVOLUTION 4.0 (IR4.0) + Explain 4 industrial revolution © Identity the influence of 4IR on the economy Scanned with CamScannerTOPIC 2 NATIONAL INCOME ACCOUNTING 2.4 DEFINITION OF NATIONAL INCOME ‘The flow of goods and services by a nation over a period of time, usually a year OR National income is the fotal payment received by the factors of production in a country during a year. 2.4.4 DEFINITION OF GROSS DOMESTIC PRODUCT (GDP) GOP is the total money value ofthe all_final goods and services produced within a country in a given time period DEFINITION OF GROSS NATIONAL PRODUCT (GNP) GNP is the total market value of all__final goods and services produced bya country’s residence ina given time period 2.4.2 MARKET PRICE (MP) ‘Market price refers tothe current price in the market through the forces of demand and supply. Market prices are the actual price paid by the consumers, GDP (FC)= GDP (MP) -Indrect taxes + Subsidies or CGNP(C)= GOP (MP) ~Incret taxes + Subsidies FACTOR COST (FC) Factor costs the real prices that is earned by the producers or seller. NET NATIONAL PRODUCT (NNP) 'NNP is GNP minus the value of capital consumption or depreciation during the year. NNP is lso ‘eferred as National Income at market pices INI= GNPye-Depreciation value oR [NI= NNPyp + Subsidies-Indirect Taxes —l Scanned with CamScannerNATIONAL INCOME (NI) National income at factor cost (NI) is defined as the total of all income payments made to factor of production. PERSONAL INCOME (PI) Personal income is the income that is actually received by individuals as payment for factors of production ‘or as payment for items other than factors of production during a year. + Inierest on government loans {nian = Corporate income taxes anton na = EPF contributions DISPOSABLE PERSONAL INCOME (DP!) DP! is the part ofthe personal income that is left after the payment of personal direct taxes. DPI = Personal Income ~ Personal Income Tax @ Zakat PER CAPITA INCOME (PC!) ‘The average income of the citizens of a nation, calculated by dividing the national income for a certain year by the population at year PCI= National Income, Total Population Scanned with CamScanner2.2) NATIONAL INCOME ACCOUNTING (EXPENDITURE APPROACH) rte eho peta) | Pacem peat) "a + | Private testment (i) mx 1+ | ehangein stots / ventory (tSiods) m/ [eters = is ee oc ot Wat re DE] ron | setae rae Pyne ow id [factor fcone rece eared mx |) Factor income paid abroad ba) 00 Gros nal oder ot Wake rice (SP) ‘oo = | Indirect taves, bo) + ses = is al drt oar oR) ‘oa — [oesrcon tel Talon ova Scanned with CamScanner‘ITEMS Private Expenditure (C) re) Public Expenditure (G) (4 Private Investment (1) (4) ‘Change in stocks (I) (+H) Exports of goods and non factor services (X) Imports of goods and non factor services (M) Net Export (X - M) w Gross Domestic Product at market price Factor income received from abroad Factor income paid to abroad Net factor income payments from abroad co) (Factor income received ~ Factor income paid) Gross National Product at market price Indirect taxes oO Subsidies ) National Income b) NATIONAL INCOME ACCOUNTING (INCOME APPROACH) 12,000 40,000 10,000 00 11,000 8,500 2,500 65,100 4,000 3,000 41,000 Ld Scanned with CamScanner4 [slves and wages a + | Net interest Gross Interest. 00 3000 r (J Interest on Consumers Loans bo) {intrest on Government Loans te) i + [reat + | Private Corporate income + | Corporate / Company Profit (+) Dividends. (+) Undistributed Profit | {#) Corporate Income Tax gee ‘Gross National Product at Market Price TF Jnet Factorincome Payments from Abroad | (1) Factor income received from abroad m0 Sh - trae mebrepeaird ey ~~ » “Gross National Product at factor cost (GNPfE) Tn ji aie =| | National income cone f ITEMS. BM(Nillion) Income from employment -+)13,000 Income from sel-employment +)12,000 Jpeome from sere send and interest 316/800, Companies profits: '+)23,000 Gross Domestic Product market price 58,000 Factor income received from abroad 29,000 Fetes nome peld to abrond $888 Na Tac incofve payments rom abroad (413,000 (Factor income received - Factor income paid) Gross National Product factor cost 71,000 Depreciation (-)1,000 National income 70,000 10 4 Scanned with CamScanner¢) NATIONAL INCOME ACCOUNTING (PRODUCT APPROACH) does Avene, St : Secondary Sector i ion) + | Salaries and wages [+ [net interest Gross Interest ox 0 | (() Interest on Consumers Loans (x) (interest on Government Loans (ox) + [Rent mx + | Private Corporate income vx + | Corporate / Company Profit x (+) Dividends oo (+) Undistributed Profit 0K (+) Corporate income Tax 0K Gross National Product at Market Price (GNPmo) WK + | Net Factor Income Payments from Abroad {#) Factor income received from abroad 10 () Factorincome paid abroad (09) 00% ‘Gross National Product at factor cost (GNPfc) KKK > [Depreciation to) National Income 20KK Fry Scanned with CamScannerTEMS Agriculture, forest and hing ining and uarying ®) Manufacturing ) construction () ect, gas and water () Fransprt, storage and communication (+) Wholesale etl hotel and restaurant (+) Finance surance and realestate @) Goverment Serves (4) other services @ ross Domestic Product at marke price Factor income recived om abroad 35,000 Factor ica pai to abroad 1000 et factor nem payment fem abroed “ 7900 Factor income esved~factarincome pid) Gross National Product at market price 351,000 nde toes 0 (600) subsides 0 700 Gross National Product at factor cost 351,200 Depreciation 6 5000 [sates come 346,200 2 Scanned with CamScanner2.3.1 PROBLEMS RELATED TO NATIONAL INCOME Problem of Problem of transfer unpaid payment activities & PROBLEMS OF Problem of ee caLcuLaTine | |"! peoreciaton informat NATIONAL INCOME Problems of activities that are Problem of illegal yet double counting productive Problem of transfer payment Several types of govermen'sexpendiue are EXCLUDED ftom caution of NI in cetin counties such as, i oO Thevalue of fixed deposits, The generallevelof picerises Many countries face defieit bonds life insurance policy & and producers make higher _balance of trade since imports money would depreciate interm profits willead producers _are greater than export. ‘of real income. increase their level of Import increase because the Production & investment & will imported product are now The value of fixed deposits, create jb opportunites, cheaper than domestic people will save ess products 46 —————_—_$_ — Scanned with CamScannerTT 534 INFLATION RATE 35 METHOD TO CONTROL INFLATION a. Monetary Policy ge i. Open market operation ~ selling of securities or short term bonds to the public & banking community by the central bank directly reduce the total amount of cash balances in the public asset portfolio and cash reserve with the commercial banks. li, Raising reserve requirement - Central Bank to reduce cash resources in commercial banks & force commercial banks to restrict thei lending activites. lil, Raising discount rate — central banks directed towards credit squeeze to control ination forest rate — persuade commercial banks to increase their rates of interest ‘on deposits from the public, — Ena Increase in taxes ~ reduce the impacto inflation on the economy, reduce the disposable income of individuals and their consumption of goods and services. b. Fiscal Policy Peed li. Decrease in government spending — wil directly affect agaregste demand, wil cut the salary ofall civil servants and postpone its development projects to reduce the purchasing Power ofthe public. Scanned with CamScanner. Direct Control Policy y/ DIRECT CONTROL = IYER) NF} i. Price Control and Rationing — will control the price of goads by fixing floor price & a ceiling price. Rationing is practiced in some countries where the gov. control essential goods. li, Compulsory Savings — is essential to introduce a compulsory saving plan fii, Anti - Hoarding Campaign ~ when reports are made against producers and consumers who store goods unnecessarily 48 _—_—$—ea Scanned with CamScanner64a 612 643 TOPIC 6 MONEY AND BANKING DEFINITION OF MONEY ‘Money is defined as anything that acts 2s a medium of exchange, "Money is something that people (oneraly accept as payment or goods and services. tis also used to pay off debts, FUNCTIONS OF MONEY @. Medium of Exchange Money 2s a medium of exchange removes the inconvenience and inefficiency of barter system, The introduction of money as a medium of exchange in the economy eliminated the need for ‘3a double coincidence of wants because generally people could now accept money in exchange of goods and services. b. Measure of Value Society finds it convenient to use monetary units as a yardstick for measuring measure goods and services. The Ringgit is used to measure the value of goods and services in Malaysia. For fexample, the cost of a compact disc is quoted as being RM15 and not as 10 apples. The use fof money as a common measurement means that products need to only have ther prices, sfated in tems of monetary units. Store of Value Stor of value refers modi 1 be hel Jer to et to buy and Salli al diferent mes and at different places. Therefore, mone a store of value Money can be held in reserve for future spending. The value can be held overtime for as long as the value dos not fall Standard of Deferred Payment Money serves as a unit or Standard of deferred payment or in terms of which all future payments are expressed, Money makes it possible for people to make a contact or an agreement to ‘exchange goods or sotle debis in the future CHARACTERISTICS OF MONEY 50 ati Scanned with CamScanner{14 TYPES OF MONEY ‘COMMODITY MONEY Commodity money is any item that has its own value and is used as a means of payment. For ‘example, are tobacco, cowrie shells, cigarettes and so on. + TOKEN MONEY Toker mney refer to money which has a lower metalic vale then its face value. For example, cons proved in Malaysia such a 5 sen, 10 sen, 20 sen and 50 sen + LEGAL TENDER Lega tender is paper money that a government has approved to be accepted as @ means of payment and as a means of setting debts. For example, in Malaysia, Ringgt Malaysia (RM) is legal tender fr any payment. ll transactions in Malaysia wil bein RM. + FIAT MONEY Fiat money is anything thatthe government has ordered or declared to be money. Fiat money is issued by the central bank of a county. In Malaysia, money is issued by the central bank known ‘as Bank Negara Malaysia. Fiat money includes coins and paper money which are called currency + DEMAND DEPOSIT A demand depositis money that i transferable by way of cheques. itis generally accepted by the publi since the issuing authority is trustworthy. Demand deposits are also known as bank deposits ‘or current accounts. For example, a demand deposit of RM1000 can be used to purchase a ‘washing machine DIGITAL CURRENCY Distal currency isa form of curency that fs avaitable only in digital or electronic form, and notin ‘physical frm. Itis also called digital money, electronic money, electronic currency, or cyber cash. Another example of digital currency is cryptocurtency. “Crypto” s a kind of eigital money that exists within the blockchain network, @ network that some consider more secure than any other since there is no oversight from financial authorities. Crypocurrency is mined, traded, or bought, and kept in digital ‘wallets until the owner is ready to spend or redeem i. Common examples include Bitcon, Ethereum, Litecon, and Ripple. 621 MONEY DEMAND DEFINITION KEYNES LIQUIDITY PREFERENCE THEORY OF INTEREST + Theory that explains demand for money in an economy. Demand for cash is an economy influenced by 3 motives. 51 Scanned with CamScanner622 PURPOSE OF MONEY DEMAND FOR MONEY Household need cash by gods Actes refers to future predictions cx eves, wil fms need cash cof bonds and stocks forthe purpose toby aor of production Household need cashtopayfor of generating profit. Influence byincome,highicome ——_unerpected expenses suchas transaction wilincese hospitals or car pails 623 DEMAND MONEY CURVES 1 rn Aransction ad Sqeclatie Deal for ‘tal Desnd for Precuctionary Deasd for Money Uh) Woney (M+ 4) 5 us 52 a Scanned with CamScannera aaa aT 34 NONEY SUPPLY DEFINITION ‘Supply of money — the total of all types of money in an economy. 32 TYPES OF NONEY SUPPLY |) M1: Narrow money ‘narrow defrition of money supply is given as Mt and it comprises ofthe most iquid assets orl. The most liquid assels are coins, notes and demand deposits (curent account) at ommercal banks, They are the most liquid assets since they can be used as paymenis and setlements of debis directly without any conversion ji) M2: Near Money + M1 This is slightly broad definition of money supply as it includes some less liquid assets. It ‘comprise of M1 and also savings and fixed accounts af commercial banks and Bank Negara Malaysia, negotiable bill and Bank Negara Malaysia's certificates. These assets serve the function 1388 love value and part of our wealth but they are sai to be less liquid as they need to turn into ‘cash frst before can be used as medium of exchange. They can be converted easy and do not take long to do it. That is why they are also labeled as ‘narrow near money’ Because this is just natraw measurement of near money. ji) M3: Broad Money This isa broad definition of money. M3 includes all the M2 money supply plus saving and fixed deposits at other financial institutions, merchant bank and discount houses. These and fixed deposits at other institutions are part of near money, as they need to be converted into cash too, before it can be used to make payment or setting debts. [BROAD NEAR MO! 3 33 Scanned with CamScanner6.3.3 MONEY SUPPLY THEORY BY IRVING FISHER Fisher proposed that there was a stable and predictable relationship between the quantity of money in circulation in an economy, and the price level, using his famous equation: > MV=PT, where: > M= the stock of money > V=the velocity of circulation > P=average prices > T= the number of transactions 6.3.4 SUPPLY MONEY CURVE Interest rate M iy ‘A change in the interest rate from is to iz does not affect the money supply and this is therefore depicted by a vertical ine which is entirely inelastic with regards to the interest rate. 54 a Scanned with CamScanner————————————=C~ {CENTRAL BANK ‘The central bank is an important financial institution in every country and plays active role in implementing govemment’s economic policy. COMMERCIAL BANK ‘Acommercial bank is an institution that is owned by the private sector and i aprofi-making insttuton. 2 FUNCTIONS OF CENTRAL BANK To issue currency and to safeguard the external value of the currency ‘The central bank has been issuing currency since 1967, i also helps to safeguard the value of the currency. i). Banker to the government “The central bank keeps the governments principle's bank account, receive tax and oer revenue and makes payments with respect to government expenditures. Act as source of financing forthe federal government. ii), Banker to the banks ‘The central bank performs several function as to Keep cash reserves of commercial banks inthe ‘economy and thus acts as a custodian of the reserves ofthe country which suppor its credit and banking system, jv) Promotes monetary stability of the country Responsible in achieving monetary stabilty, control of credit and hence money supply as an essential condition for continued growth. The central bank uses quantiaive and qualtaive measures fo ensure monetary stability. \v)__ Holder ofthe country’s stock of gold and foreign currency reserves ‘The central bank manages the nation's foreign exchanges reserves, implements the government exchange rate and balance of payment policy. FUNTIONS OF COMMERCIAL BANK + Accepting deposits from customer ‘+ Providing loans and advances © Direct ans, overdraf, discounting of tills + Providing other banking services & facilites Facilitating foreign exchange transaction Issuing bank drafts, cheques and traveler's cheque Purchasing or seling stock exchange secures Enabling fund transfers from one place another Providing advice on financial matters Providing Automated Teller Machine (ATM) 55 Scanned with CamScannerTTB, TOPIC 7 INTERNATIONAL ECONOMICS {A DEFINITION OF INTERNATIONAL TRADE Intematonal rade refers to exchange of goods and services between the peopl of Wo counts, of the word. On the other hand, inforal trade refers to the exchange of goods and services win the polical boundaries ofa county Intemational trade is important because it increases production & give consumers a gear varity of products +42 DIFFERENCE BETWEEN DOMESTIC TRADE AND INTERNATIONAL TRADE , Aspect International Trade Faclors of Production Tmobity of factors of ‘obly of facta of production production on labour between | where labourers are re io countries due to nancial move win he courry constrains, language barirs and cultural differences, carency Different counties have diferent | Trade lakes pace with fe currencies wit atfrent values | country, ein Nalasia al ‘vansactons wil bein Malaysian Ringgit foetamee Tabi sada, eteion | Boras ton oy aba and elton wile cfortin | domes eels Aloe of eet aun Protectionism Tariffs, quotas, embargoes and_| Proteconism snl praciced rnon-tarif barriers | Documentation Grealer documentation ike | No documentation needed import and expor licences, | travellers cheques, bils of ‘exchange el. [See of Market Relatively large ‘Small marked se 37 Scanned with CamScanner7.1.9 MERITS AND DEMERITS OF INTERNATIONAL TRADE wae PEW Eis jon & Economies Of - _ Complicated Proced 4 ots ae ‘+ Optimum Utilization Of Resources + Economic & Political Dependence - Quality Products At Cheap Prices == * Adverse Effect On Domestic Industries + New Industries & Employment + Exhaustion Of Natural Resources/Depletion Opportunities Of Country’s Reserves Of Communication & + Sharing Of Knowledge & Acquiring Modern Technology 7.4 ABSOLUTE ADVANTAGE THEORY Definition: The abiliy of a country fo produce more efficiently than another country. ‘There are several underlying assumptions jn the absolute advantage theory. Hi ‘There are only two countries in the world. 2 Oniywo good reproduce, 4. Fro ade ots betwen these two counties 4 Notranspratn costae involved 6. lente production nctons between ang counties. Production before specialization [County [Cotton [Rice Malaysia 20 . Walasi hasan absolle hina as an boi advantage in a Producing cotton. acvanipge bh pode ‘cis Scanned with CamScanner aeCountry Cotton Rice Malaysia 0 120 China 80 0 TOTAL 80 120 ‘Total world output has increased with specialization. COMPARATIVE ADVANTAGE THEORY Definition: The abilty of a country to produce goods ata lower opportunity cost than another country. Production before specialization Country Cotton Rice Malaysia [60 ] [10 ] China 20 10 TOTAL 80 20 ‘Malaysia has an absolute advantage in producing cotton, ‘SPECIALIZATION WILL NOT TAKE PLACE ee te NEED TO CALCULATE THE OPPORTUNITY COST_ ||!" Producing rice. SPECIALIZATION WILL TAKE PLACE Country Cotton Rice Malaysia 0.17* (10/60) 6 (60/10) 0.5 (10/20) 2* (20/10) ‘Malaysia has lower opportunity costin |] [China has lower opportunity cost in the production of cotton. the production of rice, EEE 59 Scanned with CamScanner7.2.4 PROTECTIONISM POLICY Definition: Polcy practiced by a nation on other nations in which certain barriers are imposed on | trade for economic or non-economic reasons. 7.2.2 PURPOSES AND TOOLS OF PROTECTIONISM POLICIES ‘To Correct An Adverse ‘Balance Of Payment Industries) Reasons For Protectionism To Prot Domestic Employment 7 tow Foreign i Scanned with CamScanner7.3.4 BALANCE OF PAYMENTS: Statement of systematic record of all economic transaction between one county and the rest of the world during a given period of time. ‘A county's balance of payments refers to the balance of financial records showing the total inflow ‘of money ito the country and the total money outfiow paid to other counties. 7.3.2 STRUCTURE OF MALAYSIAN BALANCE OF PAYMENTS: 4. CURRENT ACCOUNT Structure of Malaysian 2. CAPITAL Balance of Payments ACCOUNT 3. OFFICIAL RESERVE ACCOUNT CURRENT ACCOUNT (0 The current account contains receipts and payments on goods and services. Q The current account has four components: = Merchandise trade balance * Service balance = Netincome Current transfers BALANCE ON CURRENT ACCOUI FRADE BALANCE + SERVICE BALANCE + NET INCOME + CURRENT TRANSFER Scanned with CamScanner+ WAYS TO OVERCOME THE DISEQUILIBRIUM IN BALANCE OF PAYMENTS Disequilibrium occurs when there is a deficit or surplus in the. [MEASURES TO CORRECT DISEQUILIBRIUM 7.44 EXCHANGE RATE DEFINITION: The price of one curency in terms of another currency. MA OL, || tev fallacies fe deco god on ave fied *) a | standard || lationship to each other. \/ tretion_|] * Countries have to peg their currencies against the U.S, dolar instead of woods |] gold \ Site Ww, site | * Most trading countries wil alow tei exchange rates move up or down in techange || Order to stabilize any excess supply or demand based on supply and i dlermand in he foreign exchange market 7 —— Scanned with CamScanner7.4.2 FIXED EXCHANGE RATE «There are two ways the price of@ currency can be determined against another. fixed, or pegged rate lea rate te government (central bank) sets and mainains as the official exchange rate. + -Asetprice wil be determined against a major world cuency (usually the U.S. dol, but also other imajorcurencies such asthe euro, the yen or a basket of currencies). In order to maintain the local exchange rte, the central bank buys and sell its own currency on the foreign exchange marke in etum forthe currency to which iis pegged. FLOATING EXCHANGE RATE + Afloating exchange rate is determined by the private market through supply and demand. + A floating rate is often termed “self-corectng,” 2s any differences in supply and demand wi automatically be corrected in the market. EXAMPLE: if demand for a currency is low, its value wil decrease, thus making imported goods ‘more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correcton i changing the market. A floating exchange rate is constantly 66 —e Scanned with CamScanner