Worksheet-ExchangeRateDeterminants
1.
Determinant: US economic growth
Price of Peso in terms of USD
Supply of Peso from Mexico
Demand for Peso in US
Quantity of Peso in US
Demand line shifts right because more Pesos are demanded from the US
2.
Determinant: Political turmoil in Syria
Price of SP in terms of euros
Supply of SP
Demand for SP
Quantity of SP
Demand line shifts left
3.
Determinant: Investors sweeping in to Romania
Price of RON in terms of euros
Supply of RON
Demand for RON
Quantity of RON
Demand line shifts right because investors are demanding RON
4.
Price of CHE in terms of euros
Supply of CHE
Demand for CHE
Quantity of CHE
Demand line shifts right because europeans will want to save their money in Switzerland to get a higher return on their investment
5.
Price of Indian Rupee in terms of euros
Supply of Indian Rupee
Demand for Indian Rupee
Quantity of Indian Rupee
Demand line shifts left because demand for Indian Rupee falls.
6.
Price of Krone in terms of Euro
Supply of Krone
Demand for Krone
Quantity of Krone
Demand line shifts left because europeans will demand less Krone due to higher prices in Norway. They will demand less goods/services from Norway, and therefore Krone.
Worksheet-ManagedExchangeRatesinSingapore
There are a number of disadvantages and advantages of a fixed exchange rate. The following sentences provide advantages of a floating exchange rate. Interest rates can be used to control inflation since the exchange rate does not have to be kept at a certain level. Another advantage is that ff the Marshall-Lerner condition is satisfied, the exchange rate should adjust itself to keep the current account in balance. Another advantage is that high reserves of foreign currency and gold do not need to be stored in order to control the value of the currency. For example, China keeps high amounts of foreign currency, such as USD, in order to keep their currency pegged to the USD. When they need to appreciate their currency, they increase demand for it by exchanging their high amounts of foreign currency into their currency. If they had a floating exchange rate, this hassle would be unnecessary.
Disadvantages
Now let us go over the disadvantages. International markets become uncertain with a floating exchange rate. Businesses will have difficulty predicting their future costs and revenues. For example, the tech company Apple would be unable to accurately predict future costs and revenues with floating exchange rates affecting their endeavors. This could significantly harm the company and would cause many repercussions. Another disadvantage is that a floating exchange rate can make inflation even worse. High inflation will lead to exports becoming more expensive and imports becoming cheaper. The exchange rate will fall to save the current account from a deficit. However, a lower exchange rate will cause imports to become more expensive, which will worsen the inflation.
2. What are the advantages and disadvantages of a fixed exchange rate?
There are a number of disadvantages and advantages of a fixed exchange rate. The following sentences provide advantages of a fixed exchange rate. Businesses will be able to predict future costs and revenues with a fixed exchange rate, because it is more predictable. Another advantage is that a fixed exchange rate ensures reasonable government policies on inflation, because a fixed exchange rate can lead to harmful effects on the demand for exports and imports. Another advantage is that speculation in foreign exchange markets are reduced, however, attempts to destabilize the fixed exchange rate have been made to profit financially.
Now let us go over the disadvantages. The government has to keep the exchange rate fixed. For example, if the exchange rate was in risk of depreciating, the government would increase interest rates to get the currency to appreciate. The issue, however, is that that will lead to increased unemployment. Another disadvantage is that the government has to keep high amounts of foreign currency in order to keep the exchange rate fixed. Another disadvantage is that finding the right value for the exchange rate can be very difficult, and if it is not set correctly firms may feel as if they are not competitive enough in foreign markets.
3. What is the common tool used by many governments to control inflation. Why can’t all countries use the Singapore approach?
The common tool used by many governments to control inflation is the manipulation of exchange rates. An increase in interest rates will lower inflation due to money being less accessible to investors, businesses, and consumers. A decrease in interest rates will have the opposite effect. A decrease in interest rates will lower demand for the currency, since saving in that particular country has become less attractive, which will depreciate the currency. That will make exports cheaper and imports more expensive. Not all countries use the Singapore approach, because not all countries have exports making up over 100% of their GDP. For Singapore this approach is very effective, however, for other countries it may not be.
4. Can a country use both Monetary Policy and a managed exchange rate to control inflation? Do trade-offs exist?
Monetary policy is used to control the amount of money in an economy, interest rates, and the buying/selling of government bonds. As mentioned before, interest rates may be manipulated in order to control demand for a currency. The level of demand for a currency can affect inflation, and therefore we can use monetary policy and a managed exchange rate to control inflation.
5. Evaluate the effects on the Chinese economy of an appreciation of the yuan.
The Chinese economy has a gigantic export industry. The appreciation of the yuan would have devastating consequences on the Chinese economy, and the world. An appreciation of the yuan would make their exports more expensive, and therefore less competitive in foreign markets. This would raise costs for many foreign businesses if they were relying on China as a supplier. Lower sales of exports will lead the current account to a deficit, which will have a major impact on China's economy. In conclusion, the effects of the appreciation of the yuan would be felt all around the world.
