A country with a fixed exchange rate experiences downward pressure on the exchange rate value of its currency. The central bank chooses to intervene in the market to maintain its fixed exchange rate.
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How would the central bank go about intervening?
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- If a country’s par exchange rate is overvalued, what kind of intervention would that country’s central bank be forced to undertake, and what kind of effect would it have on its international reserves? What must happen if this country’s central bank decides not to intervene anymore?Which of the following is not an argument for central bank intervention? Exchange rates are highly volatile. Exchange rate fluctuations have an adverse effect on the macroeconomy. The market knows better than economic policy makers what the appropriate level of the exchange rate is. Central bank intervention can smooth out fluctuations in exchange rates.Explain the managed floating exchange rate regime. How can the monetary authorities prevent effects of these exchange rate regime on money supply level and why the most of the emerging countries prefer to use this policy?
- Compared to a fixed exchange rate, a monetary union Select one: A. involves soft pegs. B. does not allow adjustments to exchange rates. C. is managed at the International Monetary Fund. D. has no central bank.Which of the following statement is incorrect? O Currency crisis is more likely happen under the fixed exchange rate system. O Capital flight is more likely occur under the fixed exchange rate system. Fixed exchange rate regime relied on the ability of central banks to intervene in the currency market. O China is taking free floating exchange rate system.Explain why the following statement is true or false: “Direct intervention for currency valuation involves limiting the ability to exchange domestic currency for foreign currency.”
- Description A system in which exchange rates are held constant A system in which exchange rates are determined by market forces, rather than government intervention A system in which exchange rates are allowed to fluctuate, but are subject to government intervention A system in which the home currency is synchronized with the value of a particular foreign currency One advantage of a Fixed Exchange Rate Systems Managed Float Freely Floating O Pegged O exchange rate system is that the country with such a system is less affected by inflation in other countries..One proposal to stabilize the international monetary system involves setting exchange rates at their purchasing power parity rates. Once exchange rates are correctly aligned (according to PPP), each nation would adjust its monetary policy so as to maintain them. What problems might arise from using the PPP rate as a guide to the equilibrium exchange rate?If a country devalues its currency, that will immediately improve its trade deficit.
- A U.S. company purchases inventory from a foreign vendor, and purchases are denominated in the foreign currency (FC). The U.S. dollar is expected to weaken against the FC. Explain how a forward contract might be employed as a hedge against exchange rate risk.Under a flexible exchange rate system, a decrease in the value of a domestic currency in terms of foreign currencies is referred to as Answer 1. an appreciation. 2. a depreciation. 3. a devaluation. 4. a revaluation.Leads are deliberate early payments of amounts due to be paid in foreign currency to overseas suppliers, or other foreign currency payments. Leads can avoid the risk that the sterling cost of these payments may rise if the amounts of the payments are quoted in foreign currency and the foreign currency increases in value Under what circumstances can how an international company can use ‘leads and lags’ to protect itself against foreign exchange risk.