Maintaining a Pegged Exchange Rate When Currency is Overvalued

Maintaining a Pegged Exchange Rate When Currency is Overvalued

The fixed exchange rate is above the market exchange rate. it creates a surplus of currency.
Solution

• tariffs or quotas to reduce foreign imports(impose tax on foreign goods will make te prices higher and the higher price will keep people from buying foreign goods, so the demand for the other country say USD will go down and the supply for CAD will also go down)
• subsidize exports( we make our own goods cheaper, CAD will go up)
• ration availability of foreign currency( supply of CAD will go down)
• decrease income through monetary or fiscal policy( if we lower income, demand for foreign goods will go down, the demand for foreign currency will go down and supply of CAD will go down)How to lower people's income,a. decrease the money supply; MS goes down, Real GDP goes down ==> incometo go down. b. Increase interest rate ==> Real GDP goes down and income goes down, this way we keep the fixed or pegged exchange rate. Te down side of keeping the exchange rate,you can push the economy into recession.
• devalue the currency:If the demand for CAD goes up ,it devalues our currency and creates shortage. To get our currency value up, we need to increase our income==> import spending to go up ==> demand for foreign currency to go up ==> supply for CAD to go up. We cn lso use money supply and interst rate to devalue our currency.

Decrease money supply>decrease real GDP> less income> less import spending>less demand for foreign currency> increase in interest rates> more demand for CAD
Dr. Stephanie Powers, "Exchange rate", Intro to Macroeconomics.(Lecture, Donald School of Business, Red Deer Alberta, Winter 2012)