Aggregate Demand with Flexible Exchange Rate

In this chapter, Professor Sachs discusses international trade and how it is affected by the exchange rate, which is in turn affected by financial flows and the differences of interest rates at home and abroad. There are two ways to manage the exchange rates of a country, namely by supply and demand, or by the central bank setting the price. This is explained using the case of exchange rate of Renminbi to the US dollar, as managed by the People’s Bank of China. Countries have the right under international principles to allow their currencies to fluctuate or to decide that they’re going to stabilize the value of their currency with respect to another currency (in the case of a floating or fixed exchange rate). Sachs also talks about how the exchange rate system affects monetary and fiscal policy.

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