Answer to Question #256953 in Macroeconomics for Pere

Question

Identify and discuss five (5) criteria relevant for a country or countries wishing to decide on the particular form of exchange rate regime best suited to their economic structure.

Answer 1

Inflation- a country should compare its currency purchasing power with the other country's currency purchasing power. It should consider its inflation rates in comparison to other countries. Because if it has low inflation, its currency will be more vital than that of a country with higher inflation rates.

Interest rates- the central banks of different countries use the interest rate to moderate inflation rates within the country. When choosing the exchange rate regime, a country should consider the interest rates of the other country. The higher the interest rates, the more the foreign capital, thus boosting the local currency.

Political stability- political stability in any country attracts foreign investors increasing the currency rate and vice versa. A country should consider the political stability of the other country before engaging in an exchange rate.

Economic health- this should be put into consideration because a strong economy attracts foreign investors, thus lowering the inflation rates and increasing the currency exchange rate.

Current account deficit- the other country's currency weakens a country's currency if it has a higher current account deficit. Therefore a country should consider the other country's deficit status to avoid weakening of the currency.