Question

What idiosyncratic factors make each of the countries below more vulnerable or less vulnerable to currency and inflation volatility? Factors you might choose from to focus on include each country’s: composition of GDP, historic GDP growth, currency peg, government stability, the real interest rate, money supply growth, ability to print money, drivers of foreign investment and the rule of law, inflation history, and debt to GDP.

• Brazil:

o Currency

o Inflation

• Hong Kong:

o Currency

o Inflation

• United Arab Emirates:

o Currency

o Inflation

• United States:

o Currency

o Inflation

Answer 1

Ans

The various countries like Brazil, Hong Kong , United Arab Emirates , United States are affected by the various factors which make them more or less vulnerable to currency and inflation volatility they are:

1. Money supply growth.

It is a factor which make the country more vulnerable to currency and inflation volatility.As with the increase in government spending the money flow in the economy increases and also provides jobs to middle class and helps in developing natural resources which results in overall economic growth thus leading to high inflation due to the multiplier effect.

With the money supply growth due to the monetary and fiscal policy used by the government to expand the economy the income of the people increases which increases the demand for imports and ultimately lowers the exchange rate.

2. Government stability.

The country with more stable political and economic environment is more attractive to foreign investors which leads to increased investments from other countries resulting into higher economic growth and leading to appreciation in exchange rate.

Government stability has a positive impact on inflation volatility as with the stable political and economic environment the inflation is low leading to higher economic growth as their is decreased interest rate of borrowing , increased money supply in the economy .