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Suppose that an economy suddenly, deliberately fixes its exchange rate at a value that gives it a competitive advantage in world markets for trading goods (i.e., it devalues) (a) What would you expect would happen to the demand for its currency in world markets once its exports are cheaper? How will the central bank respond to maintain the fixed exchange rate? Explain (b) What will happen to the economy's money supply as the central bank acts to maintain the fixed exchange rate? Explain actions the central bank could take to ensure the money supply is unaffected.

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

Which of the following statements is accurate in regards to the US dollar:

A.

The central bank is responsible for printing the domestic currency and the value of the currency is adjusted to maintain a fixed level to another currency.
B.

The central bank has no ability to print the domestic currency and dollarization was adopted to minimize domestic inflation.
C.

Banks are responsible for printing the domestic currency and there is a floating exchange rate.
D.

The central bank (e.g. Federal Reserve) is responsible for printing the domestic currency and there is a floating exchange rate.

Suppose that monetary policy in the United States leads to an increase in interest rates relative to those in Japan. Which of the following will occur in the capital account:

A.

The demand for yen will increase.
B.

The dollar will appreciate relative to the yen.
C.

The supply of dollars will increase.
D.

The dollar will depreciate relative to the yen.

An expansionary monetary policy by the Fed would tend to:

A.

Lower the U.S. inflation rate, make exports cheaper, make imports more expensive, and raise the value of the dollar.
B.

Raise the U.S. inflation rate, make exports more expensive, make imports cheaper, and lower the value of the dollar.
C.

Raise the U.S. inflation rate, make exports cheaper, make imports more expensive, and raise the value of the dollar.
D.

Lower the U.S. inflation rate, make exports more expensive, make imports cheaper, and lower the value of the dollar.

Article:

INTRA, Portugal--Leaders of the world's top central banks warned Wednesday that escalating trade conflicts could ricochet through financial markets and hurt the world economy, potentially prolonging the era of ultralow interest rates.

Rising tensions over trade come at an awkward time for major central banks, which have started moving away from easy-money policies introduced since the global financial crisis.

In a moderated discussion in Portugal, the heads of the Federal Reserve, European Central Bank, Bank of Japan and Reserve Bank of Australia called for calm and warned that the costs of further escalation could be high.

Global stock markets sagged this week after U.S. President Donald Trump called for a fresh round of tariffs on $200 billion of Chinese goods, upping the ante after he previously approved tariffs on $50 billion of goods.

"It's very worrisome and again, I can't see any positive," said ECB President Mario Draghi, who was hosting the event, Europe's answer to the Fed's annual economic symposium in Jackson Hole, Wyo.

Mr. Draghi warned that disputes over trade have created "considerable uncertainty" for the 19-nation eurozone economy, which has slowed sharply in recent months.

The European Union said Wednesday it would impose tariffs on U.S. goods worth around [euro]2.8 billion ($3.2 billion) in response to American import tariffs on steel and aluminum. But the EU's move is unlikely to discourage the U.S. from a second round of tariffs, possibly targeted at European autos, which would hit exports worth 0.3% of the EU's economic output, said Oliver Rakau, an economist with Oxford Economics in Frankfurt.

In a shift reflecting those concerns, Mr. Draghi warned Tuesday that the bank could delay plans announced only last week to phase out its [euro]2.5 trillion bond-buying program and suggested the timing of a first interest-rate increase could be pushed back.

Jerome Powell, chairman of the Federal Reserve, warned in the discussion that changes in trade policy "could cause us to have to question the outlook." The Fed last week raised short-term interest rates and signaled a quicker pace of interest-rate increases to keep the U.S. economy from overheating.

While the tensions haven't yet dented U.S. economic growth, Mr. Powell said businesses increasingly were expressing concerns to the Fed about how the conflict might affect their plans for investment and hiring.

For Japan, whose central bank maintained its aggressive stimulus policies last week to support a softening economy, the trade conflict is "a matter of great concern," said Bank of Japan Gov. Haruhiko Kuroda.

The indirect impact on Japan's economy could be "quite significant if the escalation between China and the U.S. continues," Mr. Kuroda said, because it could affect the Asian supply chain centered on countries like Japan and Taiwan and across southeast Asia.

While the tariffs themselves might not derail the global economic recovery, the fallout could be magnified by investors through financial markets, said Australia's central bank governor, Philip Lowe.

"I believe what is happening [on trade] is incredibly worrying," Mr. Lowe said. "It wouldn't take that much for financial markets to turn this into a very big global event."

The problem for central banks, in Japan and elsewhere, is that they appear to have little ammunition left to deal with any new economic downturn after years of aggressive stimulus. The value of assets held by the Bank of Japan is set to exceed the nation's annual economic output over the coming months, while the ECB's balance sheet also will continue to grow through the end of this year. Both central banks are still holding short-term interest rates below zero.

Asked how the ECB could respond to any new recession, Mr. Draghi said he didn't expect economic growth to turn negative between now and 2020.

Mr. Powell acknowledged that central banks would have less capacity to fight any new recession because interest rates are already close to zero. The U.S. government also has less scope to increase spending than in the past, though it still has room to react, he said.

"I really hope that this escalation could be rescinded and a normal trading relationship between the U.S. and China would prevail," Mr. Kuroda said.

As there any positive outcomes of rising trade tensions, according to central bankers? . What actions would central banks in theory launch, in theory, to counteract any problems with economic growth in their countries? Why are central banks worried about these policy moves at this point in time?

Short answers please asap.

1. The Kingdom of Kong pegs its currency, the "Konger," to the U.S. dollar.

2. Suppose that The Kingdom of Kong experiences persistently higher inflation than the U.S. does. In the long run, what should happen to the value of the Konger relative to that of the dollar?

3. As a result of the developments described above, the Konger is the subject of a speculative attack. How could the Kingdom of Kong's central bank respond to defend the peg (i.e., maintain the fixed exchange rate)?

4. Identify a potential drawback of the policy identified in your answer to the previous question.

5. Use the AS-AD framework to explain why traditional monetary and fiscal policies are of limited use in this situation.

6. What term is commonly used to refer to this economic situation?

7. In general, should a country's policymakers be concerned if the country has trade imbalances with other countries?

8. If your answer to the previous question is "no," are there situations in which policymakers should be concerned about running a trade deficit? If your answer is "yes," are there situations in which policymakers should not be concerned about running a trade deficit?

9. What is the difference between a "demand-side" fiscal policy and a "supply-side" fiscal policy? Include an example of each in your answer

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