Question

1. Bezakan antara devaluasi dan susutnilai mata wang domestik.

Distinguish between devaluation and depreciation of domestic currency.

(2 markah/marks)

2. Andaikan bahawa kadar pertukaran antara ringgit Malaysia dan dolar Amerika Syarikat (RM/$AS) adalah 4.4114 pada hari Khamis dan 4.4316 pada hari berikutnya.

Suppose that the exchange rate between Malaysian ringgit and US dollar (MYR/US$) was 4.4114 on Thursday and 4.4316 on the following day.

1. Adakah ringgit menokok atau menyusut berbanding dolar Amerika dan berapakah kadar penokokan atau penyusutan (dalam bentuk peratus perubahan)?

Did the ringgit appreciate or depreciate to the US dollar and how much was the appreciation/depreciation (in percentage change terms)?

(3 markah/marks)

2. Adakah dolar Amerika menokok atau menyusut berbanding ringgit dan berapakah kadar penokokan atau penyusutan (dalam bentuk peratus perubahan)?

Did the US dollar appreciate or depreciate to the ringgit and how much was the appreciation/depreciation (in percentage change terms)?

(3 markah/marks)

3. Berbantukan rajah pasaran pertukaran asing, terangkan kesan peningkatan kadar bunga di Singapura ke atas kadar pertukaran ringgit Malaysia–dolar Singapura (RM–$S) dan nilai mata wang bagi kedua-dua negara.

With the aid of foreign exchange market diagram, explain the effect of an increase in interest rate in Singapore on the Malaysian ringgit–Singapore dollar exchange rate (MYR–S$) and currency value of both countries.

(5 markah/marks)

4. “Sebuah negara yang mengamalkan sistem kadar pertukaran tetap dengan mobiliti modal yang sempurna seharusnya melaksanakan dasar kewangan mengembang untuk meningkatkan pendapatan agregat”. Adakah anda bersetuju dengan pernyataan ini? Jelaskan.

“A country which adopts a fixed exchange rate system with perfect capital mobility should implement expansionary monetary policy to increase the aggregate income level,”. Do you agree with this statement? Explain.

(12 markah/marks)

Answer 1

a. Devaluation is the reduction in value of a currency versus another currency under fixed exchange rate, when the value of the currency is purposely lowered by the government or the central bank.

Depreciation on the other hand is under a flexible exchange rate regime when the value of the currency reduces because of the market demand and supply fluctuations.

a. Exchange rate was 4.4114, and on the following day it was 4.4316

i. Ringgit depreciated against the dollar as one will have to pay more ringgit 0.0202 (4.4316-4.4114) per dollar.

In percentage terms, the depreciation was {(4.4316/4.4114)-1}*100 = 0.5% depreciation.

i. U.S dollar appreciated against the ringgit and the appreciation was $1 = 4.4114, which later on was 4.4316. Thus cross multiplying, after appreciation $1 was 4.4316 ringgits while earlier $0.995 (4.4114/4.4316) was worth 4.4114. Thus {(1/0.995)-1}*100 = 0.5%. Thus USD appreciated by 0.5%.

a. Increase in interest rates in Singapore, implies that more foreign money and inflow from Malaysia will go to Singapore. Which will appreciate the Singapore currency as people will demand more Singaporean dollars.

Thus as demand for Singaporean dollar increases the Malaysian currency would depreciate and if one dollar was 3 ringgit, because of higher interest rates in Singapore, the Malaysian ringgit would depreciate to 3.5 per Singapore dollars. One will have to pay more Malaysian ringgit for 1 Singapore dollar.

a. Perfect capital mobility implies that investors would invest their wealth where they are getting the highest returns on their investment. Thus they are free to invest in any other country which has a higher rate of interest. Now the country adopts fixed exchange rate and implements expansionary monetary policy which implies that the interest rates are reduced by the central bank so that firms increase the level of investment by seeking credit at a lower interest rate and money supply increases. This will increase the level of output, but as there is perfect capital mobility, investors would park their savings in a foreign country where the interest rates are higher and wherein the demand for USD will increase if they are investing in U.S and this will bring the level of output to the same level as it was before the increase in money supply because the central bank buys the local currency in order to maintain the fixed exchange rate which reduces the level of money supply. Thus I don't agree with this statement because the aggregate income level does not increase.