Explain why a central bank may desire to smooth exchange rate movements of its currency.. 2. Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages? 3. What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal? 4. Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U. S. dollar. Last month, a HK$ = 0. 25 Singapore dollars. Today, a HK$=0. 30 Singapore dollars. Assume that there is much trade in the computer industry among Singapore, Hong Kong, and the U. S. and that all products are viewed as substitutes for each other and are of about the same quality. Assume that the firms invoice their products in their local currency and do not change their prices. a. Will the computer exports from the U. S. to Hong Kong increase, decrease, or remain the same? Explain. b. Will the computer exports from Singapore to the U. S. increase, decrease, or remain the same? Explain.
NOTE: Explain in great detail with example and diagram if necessary. All presentation must be prepared in Power point slide. 1. A) Central Banks can use direct intervention to change the value of currencies. Direct intervention can divide into two parts. It is sterilized intervention and non-sterilized intervention. In the sterilized intervention, Treasury securities are purchased or sold at the same time to maintain the money supply. But non-sterilized intervention is means the central bank intervenes in the foreign exchange market without adjusting for the change in the money supply. Now, we will us an example to illustrated it.
The Essay on Currency
Currency and demand deposits now constitute only about one-fourth of the money supply, the type of money now commonly considered most relevant for monetary policy. The other componentsmainly time and savings deposits and balances in money market mutual funds and in money market deposit accountsrequire no reserves to be held in the Federal Reserve. If the amount of those other kinds of money ...
Federal Reserve wants to strengthen Candian Dollar(C$).
So demand of the C$ will increase, many people will sell US Dollars. Then supply of US Dollar will increase from SS0 to SS1. At that time, supply more than demand, then value of US Dollar will go down from V0to V1. Government doesn’t care about the depreciation of US Dollar. That situation calls non-sterilized intervention. Use the same example above, the only difference is the US government takes the action to prevent the depreciation of US Dollar. When supply of the US Dollars increase, the government also issues the treasury bill to public.
Public will pay the US dollar to US government. That will offset the money supply that the government sell the US Dollar in order to buy the C$. Finally, supply of US dollar remains unchanged and value of US dollar is not affected. This is sterilized intervention. Value of US Dollar(US $) Quantity of US Dollar SS0 SS1 DD0 V0 V1 Value of US Dollar(US $) Quantity of US Dollar SS0 SS1 DD0 V0 V1 We use japan to illustrate the government intervention. Due to the recent instability in Europe, many investors have turned to the Japanese Yen as a safe currency, This sudden flood of increased demand for the Yen is actually hurting Japanese economy.
In recent year, Japan faces the serious stagflation problems. Therefore, Japan government intervenes their foreign exchange market to depreciate yen(? ) in order to stimulate their export. They try to use direct intervention to shrink its import deficit. 1. b) Central bank of a country plays crucial role on behalf of the government to intervene in the foreign exchange market to control exchange rate and currency’s value, in addition to regulating the growth of money supply in such a way as to foster economic growth of the country.
The Term Paper on Single Currency Countries European Union
... B for list of countries) to join European Monetary Union (EMU) will have their local currency exchange rates fixed at set rates to euro. In ... will be required to converge, financial prudence will be enforced, government debt reduced and low inflation maintained, Bainbridge argued that ... the euro to become one of the main exchange and reserve currencies, like the dollar and the yen. It is expected that ...
One of the major reasons for the government intervention is to smooth exchange rate movements. When a central bank feels that abrupt movements in the home currency’s value will adversely affect its economy, it intervenes to smoothen the currency movements over time. The bank’s intervention may tender trade cycles less volatile. By minimizing the exchange rate uncertainty, foreign business of the home country is enhanced and can attract more funds as investments. Smoothening currency movements tends to reduce fears in the financial markets and speculative activity that might lead to heavy decline in value of the currency.
However, speculation can only be expected to smooth exchange rate movements if underlying economic processes are relatively stable. If there is a great deal of uncertainty over future government actions and their economic impact, expectations will not be strongly held. Thus expectations can change dramatically from day- to-day, leading to rapidly fluctuating exchange rates. 2. The government of Asian country should not allow their currencies to float freely as it may leads to critical problems to the country.
Free floating currency policy may trigger speculation on currency that can bring about financial crisis. For example, the financial crisis of Asia countries in 1997, the most famous speculator George Soros had benefited billions of money by going short of the Asian countries currency which result collapse of the country economy. Furthermore, we take China as another example. The growth rate of China GDP is 9. 30% in 2011, the main force of the high growth GDP in China is export of good and services which mainly due to the low price or the low exchange rate of currency.
Free floating currency will bring RMB appreciate and cut back its export which means lower GDP and lower welfare of the people. The advantages of freely floating exchange rate system are each country may become more insulated against the economic problems in other countries. The unfavourable effect of central bank interventions to economy is no longer exist. Governments are not restricted by exchange rate boundaries when setting new policies. Besides, the capital flow restrictions are lesser thus enhancing the efficiency of the financial market.
The Research paper on Arbitrage: Foreign Exchange Market and Rate
... Triangular arbitrage is possible when the actual cross exchange rate between two currencies differs from what it should be. The appropriate ... Mexico creates a demand for loanable funds, which places upward pressure on Mexican interest rates, which increases the forward discount ... statistical tests. For this subject, newspapers are not a good source as they often confuse speculation with arbitrage. ...
The disadvantages of freely floating exchange rate system are the multinational companies need to devote substantial resources to manage their exposure to exchange rate fluctuation. Furthermore, the country that initially experienced economic problems may have its problem compounded. Advantages of fixed exchange rate US and UK US inflation higher than UK inflation Price of US goods will higher than UK US consumer demands more UK goods and UK consumer demands less US goods Demand for UK goods going up and Demand for US goods going down Demands of UK goods more than supply
Price of UK goods will go up Inflation in UK also increase Now unemployment rate in US very high( Demand of US goods less than supply) * Income of US people decrease * Demands of UK goods decrease * Demands of UK goods less than supply * Unemployment rate in UK go up Freely-floating exchange rate system US inflation increase * Price of US goods go up and UK goods become cheaper. US consumer turns to buy UK goods. Demands of UK goods by US consumer increase. Demand more than supply. UK goods appreciate. * In order to buying the cheaper thing, people will choose UK goods.
Demands of US goods decrease * After price of UK goods increase, it will make US consumer feel expensive. Then the demands of UK goods go down in US. But the price of UK goods still remains the same for UK consumers. * UK customer still purchase US goods although US inflation going up (? appreciate) * No effect on Demands of UK goods Government increase interest rate * Foreign deposit increase * Demands of Ringgit increase * Value of Ringgit increase * Exchange Rate go down US inflation going up * Demands of US goods go down * Demands of USD Dollar go down * USD Dollar depreciate Import price in US increase * Demand in US goods increase( foreign goods are more expensive for US consumer, they turn to buy US goods) * Price level for US goods increase * Double inflation US Unemployment go up * Income of US people go down * Import goods are too expensive for them then demands for import goods decrease * Supply of US Dollar go down( Nobody wants to purchase foreign goods) * Demands > Supply [ US Dollar appreciate] * Import goods now cheaper for them, people turn to buy it, demands for import goods increase and demands for local goods decrease.
The Essay on Natural Increase Rate People High
Identify those areas of the world which have very high rates of natural increase in population today and give reasons for them. Rate of natural increase is defined as the rate at which a population is increasing / decreasing in a given year due to a surplus or deficit of births over deaths, expressed as a percentage of the base population. The birth rate (Br) is the number of live births per 1000 ...
