Question

Prepare a two page (double-spaced) essay and answer the following questions:

Why the simultaneous targeting of the money supply and interest rates is sometimes impossible to achieve? How do central banks intervene in foreign exchange markets? What did the Bretton Woods Agreement do to the ability of foreign exchange rates to fluctuate freely?

Answer 1

The Fed cannot target both an interest rate and a monetary aggregate simultaneous For example-For example,By controlling the intrest rate if there was recession in an economy and it is recovering from that recession and the economies is presently acheiving full employ­ment with aggregate demand, output, employment and prices all registering a rise, the transac­tions demand for money will increase.and rate of intrest will fall,and if the monetary authorities have chosen to stabilise the interest rate, they would adopt tight monetary policy to prevent the interest rate from going up.But the tight money policy to check the rate of interest from rising will lower the aggregate demand when the economy is recovering from recession, and will again cause the recessionary situation. Thus an attempt by the Central Bank to stabilise the interest rate will make the econ­omy unstable.

2.There are mainly four methods of intervening in the foreign exchange market.

1.One method is related to negotiate in which central banks and ministry of finance negotiate over a currency .

2.Operational intervention- Under this buying and selling of currencies takes place

3Concerted intervention-Under this method.many representatives from varying countries can unify and discuss apprehensions over a currency that may be continuously fluctuating

4.Sterilized Intervention-It involves a central bank using its monetary policy practices; doing so through adjusting its interest rate goals and its open market operations to intervene in the forex market. Another way of describing the event of sterilizing a currency is when a central bank sells market instruments to try and claw back excess funds. There is a possibility of Forex interventions to go unsterilized or perhaps slightly sterilized when performances in the currency market are aligned along with monetary policies as well as foreign exchange policies.

C.Under bretton woods agreement exhange rate chnages of less than 10% were however allowed without fund approval.NAtions were to finance .It is an adjustable peg system