Exchange Rate Research Paper

The value of a currency is the worth of it as compared to or with other currencies. The value of a currency against other currencies is the exchanged rate of that currency. Exchange rate management or control in countries differs. While some practice fixed exchange rate regime, others also allow the forces of demand and supply to determine the value (price) of the currencies. Currency fluctuations normally happen in countries where they practice the free exchange rate system.

It is the rate at which depository institutions borrow and lend from one another in the federal funds market. The FOMC’s open market operations lower the rate by increasing the reserves supplied to the economy, or alternatively, raise the rate by reducing the supply of balances. Due to a term structure of interest rates, the changes in the short-term interest rates are transmitted to the long-term interest rates since the financial markets expect the changes to persist for an extended period of time or assume that they convey information about the future monetary policy. Also, the inflation inertia ensures that the change in the federal funds rate effectively influences the real interest rate which is equivalent of the cost of borrowing. By altering the cost, federal funds rate indirectly affects the spending and investment by households and businesses, which on their turn, impact output and inflation in the economy.

It affects the distribution of real income, people on fixed incomes suffer as the purchasing power of their incomes decrease as price levels rise. Secondly, purchasing power od households on fixed income decline, as inflation tends to result in more unequal distribution of income as those on lower incomes find their wages do not rise as quickly as those on higher incomes. In times of high inflation household tend to purchase real assets that retain their real value since their prices rise faster than the inflation rate. Finally, another negative impact is the income tax earners suffer from fiscal drag pay rises to combat inflation put them into higher marginal tax brackets. This means as employees’ nominal wages increase with inflation their real wage (purchasing power of nominal wages) may remain constant.

The international trade has some assurance that the exchange rates are kept at a fixed rate and thus reducing uncertainty in international trade. iii. It does not allow savers to earn a return below the inflation

STEP 1: Subtract each discount from 100% 100% - 5% = 95% 100% - 10% = 90% STEP 2: Multiply them together. 95% X 90% 0.95 X 0.90 = 0.855 ( Net price equivalent rate ) Net price = List Price X Net Price Equivalent Rate = ( $1,000 X 6 fireplaces ) X 0.855 = $5,130 d) What are the steps to calculate the single equivalent discount rate and how to get the trade discount? Firstly, we must compute the complement of each rate. Next, multiply all the complement rate as decimal and write the product as a percent. Then, subtract the product from 100% to get the equivalent single discount rate.

b. the effective loan yield will increase as a result of the decrease in the LIBOR and the bank would be able to offer more loans in the future. 2. a. The effective loan yield will increase as a result of 1% increase in the LIBOR and the value of the currency will also increase allowing the bank to offer more loans at attractive rates. b. The effective loan yield will decrease as a result of 0.75% decrease in the LIBOR and the value of the currency will also decrease which will force the bank to charge higher borrowing rates and may not be able to make loans in the

On the other hand, the LM curve is affected by Monetary Policy. An expansionary monetary policy (where the monetary authority of an economy purchases bonds to expand the money supply) would cause the LM curve to shift to the right. A contractionary fiscal policy (central bank buys back bonds to reduce the money supply in the economy) would shift the LM curve to the left. IS/LM curve shift can also cause fluctuations in Business Cycle. Business Cycle is the movement of GDP in the long term.

In other words, it is the amount of money that the banks can lend out to investors. Monetarists differ from keynesians in the ideology that monetary policy in more effective to control and manage the economy as a whole with wages, price levels, employment, money supply, inflation, etc. They believe that the government subsidized bank, known as the FED can control the economy and that fiscal policy only affects specific companies, and a small percentage of the population. Monetarist theory asserts that variations in the money supply have major influences on national output in the short run and on price levels over longer periods. A typical monetarists would be opposed to the government role of controlling taxes and wages and instead believe that the central bank can adversely control all of the necessary regulations the economy

Contractionary monetary policy involves the manipulation of aggregate demand through the increasing of interest rate, which aims to decrease investment and consumption.With this policy the central bank would decrease money supply and more people would demand money. When there are lots of people demanding money but a limited supply of money the cost of borrowing that money increases. When the cost of money increases the demand for money decreases.Therefore, investment and consumption would decrease. This would also cause a leftward shift of aggregate demand. The most efficient way to decrease inflation is through contractionary monetary policy.

Since the company weakens supply while demand stays the same, the price will increase. The producer believes that the price will rise in the future and makes a rational decision to slow production, and this decision partially affects what happens in the future. By relying on the rational expectations theory, companies can inadvertently effect future inflation in an economy.