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Economics Question
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| Tudo Beleza |
Countries with currencies that are expected to appreciate will have higher interest rate than countries with currencies that are expected to depreciate.
True, False or Uncertain
Thank you for any help, this question is confusing me. |
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| Maaz |
False, because countries with currencies that are expected to depreciate will have higher interest rate in order to attract foreign (or national private) investiments which will keep the balance. However, high interest rates are not good for industry and for commerce. Tomorrow I'll try to look for a magazine in which I read about it :)
(I was supposed to be sleeping right now, so I'd rather have someone else checking my answer) |
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| elektrikal |
| im thinkin countries with depreciating currency would have higher interest rates to make up for the lost value. so the appreciating would have less interest cuz they dont need it. or something. forget it even tho i took macroecon 3 times it still confuses me. |
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| imperium |
mmm final year of economics degree majoring in Finance & Economics.. i really should be able to do this,
Disclaimer.. my memory is poor, i rarely mention all the assumptions that have to be made, all the variables excluded etc, and this is overly simplistic .. mmm i take the last unit of macro in a few months
it depends on the ratio of imports to exports in the current account balance, but generally speaking the only people a depreciating currently disadvantages is those fat people who fly overseas on holidays (their money is worth less) .. otherwise it is very beneficial for exporters (more competitive, same product, yet able to sell cheaper), in addition more expensive imports will prop up the local competitors of such products, whcih provides an added boost to domestic economy .. mmm what else can i thin off
if the depreciation was either drastic, entirely unexpected, part of a long trend then the Reserve Bank could do a number of things, (as to why they'd care.. meh i , and their action in part would depend on whether the exchange rate was fully floated or semi, (I CAN"T EN FIND MY 2nd Year Macro textbook.. zzz), they could attempt to prop the exchange rate, it would use up large amounts of federal reserves, and the duration of this strategy is likely to be short, especially if its contrary to market forces (semi-floated scenario) .. fully floated, i doubt the reserve bank, in normal situations would intervene by playing around with the exchange rate, as as stated before depreciation is generally benenefical..
Reserve bank (monetary policy) could conduct open market operations (selling bonds) which raises the interest rate (yes there are steps in between.. but im too lazy), or government could undertake some nifty fiscal policy action, either could influence the exchange rate via interest rates, but again, wtf they'd do this?
higher interest rates lead to huge influx of foriegn capital (positive margin versus the rest of the world), consumers would likely increase their saving rate, investment would decrease in teh business sector, reduce in aggregate demand, assuming fixed rates of income, thereby lowered demand for money, which only slightly offsets foriegn capital inflow which causes an appreciation in the currency... MEHHHH i think i did it
elektrikal... do macro again :) |
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| imperium |
just musing as to why a govermental or a central banking organisation would intervene in teh currency rate via appreciating it
hypothetically if a country relied exlusively on imports, and was unable to manufacture such, perhaps then they'd want to up the purchasing power of their exchange rate.. ie some desert country *cough* middle east, food etc,
or perhaps if the government was interested in a large defense purpose, although with the money invariable lost through exchange rate fluctuations.. i fail to see how this is viable
pragmatically speaking, i guess a slight adjustment to the answer above, is where the answer lies, most countries, rarely produce all the goods that are required in their domestic industries, either due to a lack of technical knowhow, lack of primary goods in which to create such etc there are dozens of reazons, and it is all usually placed under the heading that it does not have a competitive advantage in such a good, now although the depreciation would lean favourably on the countries competitive status on such an item, it may not be enough, and there may be variables that such a fluctuation is not able to overcome
in such a situation it may necessary for the country to intervene in the exchange rate, but as any one country including the US is unable to successfully combat the market for any length of time, any such such action would only work in the short term, so either ride out the storm, or take drastic action which stems and eventually reverses the market forces (you'd need a case study to examine the hows/whys) |
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| Tudo Beleza |
| any other ideas? |
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