Question

The global economy and a government's ability to control its country's currency.

Answer 1

Solution:

The globalization of the world economy has resulted into lot of interdependencies among the economies. The impact of US economy can now be felt in Asia or across the world.

International trade happens in currencies and exchange rates play a major role in this.

In order to make their goods look cheaper, lot of countries try to devalue their currency. These are mostly export oriented countries.

Some countries mostly have exchange rate control wherein the government controls the purchase and sale of their currency. This way they can better stabilise the exchange rate and limit the volatility.

Many countries the borrowing limits of borrowing in foreign currency.

To manage exchange rates, the government may also go for ‘Soft Peg’ or ‘Hard Peg’ of their currency. In ‘Soft Peg’ they allow exchange rate to be market determined however intervene in case they rate moves more on either side of their soft peg target set. In ‘Hard Peg’, the exchange rate is fixed and unchanged.

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