Monetary Economics

2172 words 9 pages
Factors influencing Tanzania devaluation policy in its international trade

Table of Contents 1. INTRODUCTION 2 1.1. Background Information 2 1.2. Statement of the Problem 3 1.3. Justification of the Study 3 1.4. Overall Objective 4 1.5. Specific Objectives 4 1.6. Research Questions 4 1.7. Significance of the Study 4 2. LITERATURE REVIEW 5 2.1 Exchange rate analysis 5 2.2 The nominal effective exchange rate 6 2.3 The real effective exchange rate 6 3. METHODOLOGY 6 3.1 Methods of Data Collection 6 3.2 Methods of Data Analysis 6 3.2.1 Factors affecting balance of payments 6 RESEARCH BUDGET 8 TENTATIVE TIMEBLE 10
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Floating system allows the local currency to fluctuate freely against foreign currency while its exchange rate is determined by the invisible hand (market forces of demand and supply of those currencies) within a loosely regulated foreign exchange domestic or international market, where as in fixed system the rates are centrally determined by the central bank or the Currency Board in which it supplants this function of the Central Bank (Vaknin 2004). With small variations, the rates are determined periodically (most daily) in reference to a ‘peg’.
Floating rates are seen to be better in protecting the deteriorating terms of trade of the nation. If export prices fall or import prices surge the exchange rate will adjust itself to reflect the new flow of currencies and hence the resulting devaluation will restore the equilibrium. * The nominal effective exchange rate
The nominal effective exchange rate is an index number of the weighted average of bilateral exchange rates for a number of countries, where trade shares are typically used as the weights.
According to Dunn and Mutti, 2004, the effective exchange rate can be calculated for the dollar, for example, using January 1973 as the base, by calculating how much the dollar had risen or fallen since that time relative to the currencies of a number of other countries.

* The real effective exchange rate
It measure the


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