Mechanisms That Would Bring about Macroeconomic Equilibrium - Essay Example

Thirdly, the exchange rates are worthy to mention here. How our currency fares in comparison and competition with those of other countries and its fluctuations and ups and downs are included in this category.Central banks can play a pivotal role here. As far as fixed exchange rate systems are concerned, central banks can finance any disbalances and fix them up.However, in the floating exchange rate system, the currency rate is determined by the forces of demand and supply and thus, central banks cannot help there.

However, Government intervention could help bring macro-economic equilibrium in this case. Through the use of laws and regulations, it could prove to be a worthy and useful mechanism in this regard.Factors Affecting Exchange RatesNumerous different factors affect exchange rates and cause fluctuations in them.Taxes and subsidies imposed by the Government on producers of different commodities are one of them. Secondly, tariffs are another factor in this regard. They might take the form of quotas, embargo, and other forms of tariff regimes.

The state of the economy also matters. Whether the economy is in a state of a boom [good economic period with high GDP] or in a state of a slump [bad economic period with low levels of GDP] also affects the exchange rates.Government policies, laws, and regulations also affect exchange rates. The kind of laws; trade and otherwise implemented domestically and internationally also affects the exchange rates systems.The level of reserves and capital inflows and outflows, as well as the type of exchange rate that is whether it is fixed or floating, is also worthy of mention.

International monetary policies, level of imports and exports and the demand and supply for a currency are all important factors too.Inflation levels [global and domestic], wage levels, and productivity of workers is also noteworthy in this regard. Thus, all these above-mentioned multifarious factors affect exchange rates.