Reference no: EM133336599

Case Study: ABC Country a medium sized country with a population of approx. 20 million people (including children under age 10, roughly 2% of the total population) experienced several economic downturns over the last 2 yrs. (2020 - 2021) due to C-19 pandemic, especially in key sectors including global trade, decreased domestic market consumption, manufacturing - supply chain issues, that caused general concerns with ABC's capital market flows.

During the 2nd half of 2021 to date, ABC's economic indicators noted reasonable growth with a 20% - 30% increase in overall economic activity, however, with a somewhat weak currency compared to similar sized countries.

Questions:

(a) If ABC country's currency is expected to appreciate in value from 2nd qtr. '22 to year-end (assume global stability), fully explain how this will affect the country's expected exchange rates on yields. (assume the yields are based on govt. bonds).

(b) Given the information above, how would the expected exchange rate change(s) and interest rates affect the aggregate demand and supply of ABC currency? Describe in detail one macro reason for the demand function and one macro reason for the supply function.

(c) If the country expects a stronger exchange rate in 2023 (assume global stability), how would this expectation affect the current exchange rate? Base your response whether the country expected future value (in dollars) is a wise choice for the country. Why/why not.

(d) In general, why is it important for ABC country to pay attention to the foreign exchange market? What if ABC country's GDP was dependent on exports from countries with strong currency exchange rates? Include in your response the financial/economic reasons for each type of scenario as noted above.