ACCA FM Syllabus B. Financial Management Environment - Exchange Rate Policy - Notes 4 / 6
Policy of government towards the level of the exchange rate of its currency
Discussion:
It may want to influence the exchange rate by using its gold and foreign currency reserves held by its central bank to buy and sell its currency.
A fall in the exchange rate will mean that the price of imports will rise while exporters should become more internationally competitive. Import volumes should fall whilst export volumes should rise.
Output at home should rise, leading to higher economic growth and a fall in unemployment.
There should be an improvement in the current account of the balance of payments too as the gap between export values and import values improves.
However, higher import prices will feed through to a rise in inflation in the economy.
| Target | Fiscal Policy | Monetary Policy | Exchange Rates |
| Growth in the Economy | More Spending | Lower Interest Rates | Lower |
| Low Inflation | Lower Spending | Higher Interest Rates | Higher |
| BOP deficit reduction | Lower Spending | Higher Interest Rates | Lower |