Discuss some of the exchange rate arrangements that countries have entered into to bring about stability in their external accounts.
The exchange rate arrangements that the countries have entered into to bring stability in their external accounts are –
a) Wider bands: This system allows adjustment in fixed exchange rate. Under this system only 10% variation between the currencies of any two countries is allowed.
b) Crawling peg: The system of crawling peg allows continuous and regular adjustment in the exchange rate but it is limited up to 1% variation at one point of time.
c) Float management: Under this scheme the government can intervene to vary the exchange rates. It is done as per the demand of situation and has no limit as above two.
Suppose it takes 1.25 yen to buy a rupee, and the price level in Japan is 3 and the price level in India is 1.2. Calculate the real exchange rate between India and Japan (the price of Japanese goods in terms of Indian goods). (Hint: First find out the nominal exchange rate as a price of yen in rupees).