How to keep the exchange rate fixed, International Economics

Assignment Help:

Q. If the central bank does not purchase foreign assets when output increases but instead holds the money stock constant, can it still keep the exchange rate fixed at E0?

Answer: No this is for the reason that the domestic interest rate would begin to rise above R*. Traders in the foreign exchange market would start to bid up the price of domestic currency in terms of foreign currency. In the deficiency of central bank intervention the exchange rate thus would fall below E0 so as to prevent this appreciation the central bank should sell domestic currency and buy foreign assets thus increasing the money supply and preventing any excess money demand from pushing the home interest rate above R*.


Related Discussions:- How to keep the exchange rate fixed

Explain the difficulties in naming the new european currency, Q. Expl...

Q. Explain the difficulties in naming the new European currency. Answer: Amongst the reasons: Maintenance the name ECU would be misleading the ECU depreciated sharply ag

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

explain the product cycle theory in international trade

Discuss effects of ongoing inflation based on ppp theory, Discuss the effec...

Discuss the effects of ongoing inflation based on the PPP theory. Answer:  Other things equivalent money supply growth at a constant rate eventually results in ongoing price le

Explain how brazil was able to reduce the rate of inflation, Q. Expla...

Q. Explain how Brazil was able to reduce the rate of inflation from 2,669 percent in 1994 to less than 10 percent in 1997? Answer: By initiating a new currency and init

Economic investigations report, The latest economic investigations report t...

The latest economic investigations report that the recent earthquake, tsunami and nuclear disaster have led to an economic recession in Japan. This recession may reduce the demand

Increasing cost theory in international trade, A good analysis in increasin...

A good analysis in increasing cost theory with graphical analysis

Explain the difference between given expressions, Q. Explain the difference...

Q. Explain the difference between the following two expressions: Y = C(Y d ) + I + G + CA(EP*/P, Y d ) and Y = C + I +G + CA Answer: The first expression corresponds to a

Eco, Ask questionQuestion 1: Compute various indicators of the state of the...

Ask questionQuestion 1: Compute various indicators of the state of the labour market using the following information. Please show all steps of your calculation. If you do not, you

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