How a central bank fixes the exchange rate, International Economics

Assignment Help:

Q. How A Central Bank Fixes the Exchange Rate?

Answer: The Central bank should always be willing to trade currencies at the fixed exchange rate with the private actors in the foreign exchange market to hold exchange rate constant. Presume central bank fixes exchange rate at E0. Foreign exchange market is in balance when interest parity condition holds - when R the domestic interest rate equals R* the foreign interest rate plus (Ee - E)/E, the expected rate of depreciation of the domestic currency against foreign currency.

E0 is today's balance exchange rate only if:

R = R*

To embrace the domestic interest at R* the central bank's foreign exchange intervention should adjust the money supply so that R* equates aggregate real domestic money demand and the real money supply.

MS/P = L(R*,Y)

When central bank interfere to hold exchange rate fixed it should automatically adjust the domestic money supply thus that money market equilibrium is maintained with R = R*.


Related Discussions:- How a central bank fixes the exchange rate

International trade, What does the factor proportions theory posits

What does the factor proportions theory posits

International trade, explain the product cycle theory in international trad...

explain the product cycle theory in international trade

What are floating rate notes, What are floating rate notes? Explain the var...

What are floating rate notes? Explain the various types of FRNS FRNs are bonds that do not carry a fixed rate of interest. The various forms of FRNs are : Perpectual FRN Minmax

Explain the advantage a and disadvantage of globalization, Q. Explain the a...

Q. Explain the advantage a and disadvantage of globalization? Advantages - 1. Economic growth 2. Lower cost 3. Improved availability of goods and services 4. Glob

English, what is international economics ,why we study ,bebifits of interna...

what is international economics ,why we study ,bebifits of international economics ,which other is best for hhis ?

Survivor island, Identify and explain the three basic economic question tha...

Identify and explain the three basic economic question that the group of survivors will have to answer everyday

Domestic money market, Q. "Under floating rates, the economy is more vulner...

Q. "Under floating rates, the economy is more vulnerable to shocks coming from the domestic money market." Discuss. Answer: It is true statement, under floating rates an incr

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd