chapter  18
32 Pages

Fixed exchange rates and currency unions

Throughout most of our analysis concerning exchange rate changes and their effects, we have made several assumptions. First, we have assumed that exchange rates are completely free to adjust to their equilibrium level at all times. Second, we have assumed that all buying and selling of foreign exchange has occurred between individuals and/or companies located in the private sector. Third, we have assumed that national governments have not taken systematic actions to directly influence the value of their currency in the foreign exchange market. However, national governments frequently do buy and sell foreign exchange in the foreign exchange market.