Does a country (fixed exchange rate) lose control over its money
supply?
Does a country (fixed exchange rate) lose control over its money
supply?
Solutions
Expert Solution
Yes , in a fixed exchange rate country lose control over it
money supply . Basically in fixed exchange rate LM curve or money
supply came back to it's initial position . Let's see it through
mundel Flemming model.
Discuss the implications for the economy if a country
moves on to a fixed exchange rate regime in the year 2018. Take a
broad view of economic parameters.
1.
Why does the Fed not have complete control over the nation’s money
supply? Who else affects the money supply and how?
2. Milton Friedman believed that the Fed should control the
money supply precisely. In the 1960s, he proposed thay the required
reserve ratio be raised to 100%.
• How would this policy improve the Fed control of the money
supply?
Suppose a country has fixed exchange rate and no capital
controls. The country has kept the value of its currency below its
market level. Now, due to a political crisis, projections for
economic growth in coming years are revised sharply downwards. As a
result of new projections, savers wish to purchase financial assets
in other countries.(e)Will the country be able to maintain the
exchange rate? (f)Capital flows can cause problems for exchange
rate stability. So, why do most countries allow...
5. You are the head
of the central bank of a country with a fixed exchange rate and
open capital markets. Then there is a bad piece of news
which you think will cause the currency to depreciate by 20% if you
do nothing.
a. What are 3 possible
responses you can make? Draw FX market diagrams to
illustrate your
choices.
b. Explain how these 3 choices
illustrate the trilemma.