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Currency and Exchange Rates Essay Example of currency discussion problem

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ECON 231
Huang Hui

Econ 231: Intro to International Economics Problem 4: Managing the Economy One of the major influences on our economy is the Bank of Canada, which controls the money supply of the Canadian currency. By controlling the level/amount oficurrency in the market, the Bank of Canada is able to influence inflation (between 1 – 3%) by contracting the supply during times of prosperity and increasing it during times of decline. The Bank carries out monetary policy by influencing short-term interest rates. “It does this by raising and lowering the target for the overnight rate. (The "overnight rate" is the interest rate at which major financial institutions, Banks, credit unions and similar credit-giinting organizations, borrow and lend one-day (or overnight) funds among themselves.)” It has a direct, but lagging, impact on the money market, where exchange rates can be shifted to stabilize our economy, by lessening the severity of an economic cycle. Almost all countries trade on the interniiional market, the influence of one economy on another can be both valuable and detrimental. With small underdeveloped countries, more developed economies are able to „extort‟ the economy for betterment of their own. If a country were to do that, the developed economy would have to invest in the underdeveloped nation, where it directly builds up the economy within that country. Exchange rates can be simply explained as the difference between currencies of trade. Capital markets can be simply explained as the ability to trade freely across borders, where the flow of goods and services are produced in one country and used by another. When considering the exchange rates associated with the capital markets, things then become less clear as to how an exchange rate can influence the welfare of a country. This is due to the fact that currencies differ across the globe, where the strongest and more powerful currencies usually are associated with a powerful economy, like the United States (US). When that economy is doing well, their dollar is worth more, and vice versa. Looking at a global scale of things, the larger the economy, the greater the influence on the rest of the world it has. Canada is considered a small economy, and because of this, if our economy is strong, our currency will appreciate. But, given the present circumstances of our world economy, our strong Canadian dollar would prove to be bad for iv ourselves‟ because it will allow for cheaper imports. This is because other currencies aren‟t appreciating like ours, because their economies are still struggling (mainly the US). This forces us to have a much higher exchange rate and other countries to pay more for our goods and
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