Monetary Expansion Monetary policy is the process which the central bank uses for controlling the economy by affecting the interest rate. The monetary policy as controlled by RBI in INDIA could either be contractionary or expansionary. Many times the expansionary monetary policy leads to an increase in the money supply which indirectly leads to increase in disposable income, increasing the demand of goods and services and ultimately to price rise. Money supply could be in terms cash, loans and mortgages. Cheap loans at lower interest rates are like fuel in the scenario and cause
However, continued differences in economic growth rate between member countries lead to trade imbalances. The basic elements of the European Monetary System were exchange rate were agreed in the interval of plus or minus 2.25 percent with a wider range of plus or minus 6 percent, an Exchange rate mechanism, an extension of European credit facility and the European monetary
INTRODUCTION Exchange rate is “the price of a nation’s currency in terms of another currency” – Investopedia. Exchange rate can be quoted in two ways: 1. Direct Quotation: foreign currency’s price is expressed in domestic currency. 2. Indirect Quotation: domestic currency’s price is expressed in foreign currency.
When output equivalent to the demand for goods, and this occurrence is called the IS relation. Since interest rate has a negative relationship on output, the IS curve. Graphed by output against interest rates, is downward-sloping . On the other hand, LM relation arises when the financial markets are at equilibrium where the money supply is equal to the demand for money. A rise in output will boast the demand for money which will also increase interest rates, as such as, LM curve is upward-sloping.
In a fixed exchange rate regime, the depreciation and appreciation of domestic currency are determined directly by the government’s desire in order to support such economic goals as encouraging importation or exportation, correcting payment balance deficits. In a floating exchange rate regime, where the government only attempts to regulate the exchange rate indirectly, the fluctuations of exchange rate are the result of not simply one factor but always of a series of several elements and events. The study of these elements therefore approaches the problem in different ways. The following theories called international parity conditions are some of the most essential conditions in economics providing not only logical explanation for fluctuations in exchange rates but also crucial “understanding of international linkages among the market of goods, capital and foreign exchange as well as the movement of interest rates” (Imad A. Mossa, p. 304), namely purchasing power parity, law of one price, interest rate parity, Fisher
Price elasticity of demand is a relationship measure between the changes in the quantity of products demanded and the changes in product prices. It is used in economics in price sensitivity discussions because it indicates the responsiveness of a product’s demand on price changes in the market. The price elasticity of demand can either be elastic or inelastic depending on the changes in demand and the product cost. It is computed by dividing the percentage changes in the quantity of products demanded by the percentage of change in the price of the products demanded. Price elasticity of demand is elastic if a small change in price is followed with a big change in the quantity of products demanded for in the market.
sustained significant rise. The Fisher effect was first discovered by the famous economist Irving Fisher to reveal the relationship between inflation expectations and interest rates. It points out that when inflation is expected to rise, interest rates will also rise. In this case, The Fisher Effect Formula Real Interest Rate = Nominal Interest Rate - Inflation Rate The left and right sides of the formula to look at, the formula becomes: Nominal Interest Rate = Real Interest Rate + Inflation Rate In an economic system, the real interest rate is often constant, because it represents the actual purchasing power of you. In this case,Thus, when the inflation rate changes, in order to obtain the balance of the formula, the nominal interest
Exchange rate volatility and its impact: Case of India and China Exchange Rate Exchange rate between two currencies is the rate at which one currency will be exchanged for another. How to calculate exchange rate Each country manages the value of its currency through varying mechanisms. The currency can either be free-floating or fixed. 1. Movable or Adjusted Peg System A system of fixed exchange rates, but with a provision for the revaluation (usually devaluation) of a currency.
The balance of trade is the difference of export and import. The trade deficit exists when a country’s export fall behind its import. Trade surplus exists when a country’s export exceeds its import. The currency exchange rate, GDP growth rate and the inflation rate are said to be the main factors affect trading. In this report, I am going to investigate the relationship between trade by commodity (i.e.
INTEREST RATE PARITY THEORY- A hypothesis in which the interest rate differential between two nations is equivalent to the differential between the forward conversion scale and the spot swapping scale. Interest rate parity assumes a fundamental part in remote trade markets, joining premium rates, spot trade rates and outside trade rates Interest Rate Parity (IPR) theory is used to analyze the relationship between at the spot rate and a corresponding forward (future) rate of currencies. The IPR hypothesis states interest rate differentials between two separate monetary standards will be reflected in the premium or rebate for the forward swapping scale on the remote money if there is no arbitrage - the action of purchasing shares and currency