Suppose the domestic central bank maintains a fixed exchange rate and free capital mobility. Assume that...

Suppose the domestic central bank maintains a fixed exchange rate and free capital mobility. Assume that the foreign central bank does not change its monetary policy, but the domestic central bank expands credits to the domestic government. What kind of the central bank’s interventions in the foreign exchange market are necessary? Explain also their impacts on the central bank’s balance sheet. Are these impacts the same as those of open market operations? Explain your reasoning.

Expert Solution

Foreign markets also need to be expansionary by allowing cuts in interest rates, CRR and SLR and easing banking regulations to promote more credit availability and attract investors and loans to get globally competitive and achieve higher growth and real GDP.

The central bank thus now will have shrunked balanced sheet or leveraged as credit is higher and inflow is lower. Impact is different from OMO as bond buying programmes are costlier and out sizable pressure on foreign banks balance sheets.

PLEASE UPVOTE INCASE YOU LIKED THE ANSWER WILL BE ENCOURAGING FOR US THANKYOU VERY MUCH ALL THE BEST IN FUTURE

Rahul Sunny answered 2 years ago

The Central Bank is keeping a fixed exchange rate at Epar such that the domestic currency...

The Central Bank is keeping a fixed exchange rate at Epar such that the domestic currency is overvalued by purchasing domestic currency. What does the Central Bank do to demand and/or supply of foreign currency? Does this resemble the case of Lebanon or China?

Under fixed exchange rates and with imperfect capital mobility, why would the central bank choose to...

Under fixed exchange rates and with imperfect capital mobility, why would the central bank choose to sterilise the effects of balance of payments surpluses or deficits on the domestic money supply? Explain your answer with an appropriate graph.

Suppose that the central bank has fixed the exchange rate at E but then the level...

Suppose that the central bank has fixed the exchange rate at E but then the level of domestic output suddenly falls. How should the central bank respond if it wants to maintain its fixed exchange rate? Briefly explain the underlying economic intuition / mechanisms!

suppose that a nation has perfect capital mobility and a fixed exchange rate, a negatively sloped...

suppose that a nation has perfect capital mobility and a fixed exchange rate, a negatively sloped IS and positively sloped LM curve. currently the economy is in recession. Should the nation fiscal authority or its central bank take the lead in trying to raise real income? Explain your answer.

Assume that you have fixed exchange rates and a SOE with perfect capital mobility. Assume that...

Assume that you have fixed exchange rates and a SOE with perfect capital mobility. Assume that you start from an external imbalance (take the case that r in the internal equilibrium is higher than what it should be). Describe the adjustment to external equilibrium.

5. You are the head of the central bank of a country with a fixed exchange rate...

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.

Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility...

Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility (i.e., interest parity holds), and complete price stability (no ongoing inflation). Explain what effect a decrease in the world interest rate would have on the following domestic macroeconomic variables: a. The stock of foreign exchange reserves. b. The money supply. c. Real GDP. d. The price level. e. The real exchange rate.

Supposed in the fixed exchange rate regime, the Central Bank of Malaysia (BNM) is planned to...

Supposed in the fixed exchange rate regime, the Central Bank of Malaysia (BNM) is planned to implement a revaluation policy of Ringgit Malaysia (RM) to the US dollar. Using the IS-LM-BP model, briefly analyze the effect of this exchange rate policy on the Malaysian economy under perfect capital mobility assumption.

this question above .A country which adopts a fixed exchange rate system with perfect capital mobility...

this question above .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 and why you agree..i want explaination.

analyze the effect of an expansionary monetary policy under perfect capital mobility and fixed exchange rate...

analyze the effect of an expansionary monetary policy under perfect capital mobility and fixed exchange rate regime on an economy

Question