Question

1- If expected future exchange rate of Saudi Riyal (SAR) increases, what will happen to the exchange rate of SAR now? Explain with a GRAPH

2- Explain dollarization.

3. What are the functions of the IMF? What are the criticisms of the IMF?

4.Explain how price level affects exchange rates in the long run?

Answer 1

1) IF it is expected that the future exchange rate of saudi Riyal will increase so the demand for the saudi Riyal will rise but the supply will not RISe as they can get a better price to sell in the near future

THe exchange rate will definetly go up as the demand will be high and supply will be low as more and more people would be ready to buy Saudi Riyal at a high price

Here in the graph price 1 is old price and due high demand price will rise and thus at higher prices the supply of the Saudi RIyal will also rise,

Overall Equibrilium price will rise in the market.

2)

Dollarization is the term for when the U.S. dollar is used in addition to or instead of the domestic currency of another country. It is an example of currency substitution.

Dollarization usually happens when a country's own currency loses its usefulness as a medium of exchange, due to hyperinflation or instabilit

It occurs when residents of a country extensively use foreign currency alongside or instead of the domestic currency.

It can occur unofficially, without formal legal approval, or it can be official, as when a country ceases to issue a domestic currency and uses only foreign currency.

Advantages

1)Lower administrative costs,

2)A firm basis for a sounder financial sector, and

3)Lower interest rates.

Disadvantages

1) The loss of monetary autonomy, seigniorage,

2) A vital national symbol as well as greater vulnerability to foreign influence.

3) FUctions

The International Monetary Fund aims to reducing global poverty, encouraging international trade, and promoting financial stability and economic growth.

The IMF has three main functions:

1)Overseeing economic development,

2)Lending, and

3)Capacity development

Criticism

The major challenges faced by IMF include its governance structure, increasing level of politicisation, leadership challenges, performance evaluation difficulties, and dealing with social instability

4) Effect of price level in long run

In the long run, a decrease in the price level will drive down input prices and expectations about inflation, which leads to the increase in SRAS shown by shif

In the long run, the price level has increased, but the new output is once again equal to the full employment output