Question

For this question, please find an article from a mainstream news source that covers the topic of Monetary policy which highlights the importance of the Monetary Policy as it impacts the determination of exchange rates and represent it using graphs. Please also include whether you believe the Coronavirus pandemic has impacted this effect. (Please use graphs to support your answer).

Answer 1

Mainstream news article about the monetary policy:

Monetary policy increases liquidity to make economic process . It reduces liquidity to stop inflation. Central banks use interest rates, bank reserve requirements, and therefore the number of state bonds that banks must hold. of these tools affect what proportion banks can lend. When the govt or Federal Reserve System uses monetary or economic policy to expand the economy, this increases our income and our demand for imports, and ultimately lowers the rate of exchange . Contractionary policies have the other effect. This results in higher prices domestically and comparatively cheaper imports.

Importance of the Monetary Policy because it impacts the determination of exchange rates:
The market determination of exchange rates through currency carry trade is that the best example of herding and its dangers: exchange rates occupation the other of fundamentals, i.e., within the other way of what's needed to revive the in-ternational competitiveness of the general economy. After the most important financial cri-sis since a century such phenomena should make all alarm bells ring and lift the pressure for state action to prevent this type of speculation. Interventions in financial markets that are a part of the worldwide economy involve cooperation and coordination of national institutions and for specialised institu-tions with a multilateral mandate to oversee national action. within the aftermath of the most important crisis in modern history this is often even more important than in normal times. The tendency of the many governments to entrust to financial markets again the role of judge or jury over the approaching process of reform and indeed over the fate of whole nations would appear inappropriate. for instance , it's indispensable to stabi-lize exchange rates by direct and coordinated government intervention. this could take the place of the standard government stance of allowing the market to seek out rock bottom line while trying to “convince” financial markets of the credibility of the govt of the depreciating currency through pro-cyclical policies like public expenditure cuts or rate of interest hikes. It is Important for monetary policy to determine the exchange rates.
An increase within the exchange rate:
For example, a rise in UK exports to the USA will shift the demand curve for Sterling to the proper and push up the rate of exchange of the pound against the US dollar
Changes in interest rates:
Changes in interest rates affect a country’s currency. Higher interest rates cause a rise within the demand for a country’s financial assets, and a rise within the demand for a currency. The Lower interest rates reduce speculative demand for assets and as well as reduce demand for a currency. These speculative flows are called hot money.
Increases in supply of a currency:
An increase within the supply of a currency will depress its price. this might result from and increase in imports relative to exports, or speculative selling of the currency.The pace of trade of an economy influences total interest through its impact on fare and import costs, and strategy creators may abuse this connection. Deliberately changing trade rates to impact the full scale financial climate could likewise be viewed as a sort of money related approach. Changes in trades rates at first work there path into an economy by means of their impact on costs.

Coronavirus pandemic has impacted this effect:
The huge basis points cut in rates by the U.S. Federal Reserve System on economic sentiment hit by COVID-19 has disrupted central banking worldwide. whilst analysts debate whether a monetary policy response is that the right strategy, central banks across the planet are feeling the pressure to imitate to the most important rate cut by the Fed since 2008.Central banks of Australia and Malaysia have cut rates already while others like the Bank of Japan, Bank of England and therefore the European financial institution are contemplating joining the caravan.
First line of defence:
With monetary policy arising to be the de facto first line of economic defence against the ill-effects of the virus, the main target in India has turned to the Federal Reserve Bank of India’s response. Yields on 10-year government securities fell by the maximum amount as 0.12% on Wednesday within the hope of a rate cut by the RBI and that they stayed crazy Thursday. But what are the central bank’s options? Unlike other countries, the legal framework in India after the fixing of the Monetary Policy Committee (MPC) is such the RBI cannot unilaterally adjust rates. The MPC will need to meet and deliberate on things before the decision to chop rates is taken and such a call will need to be supported an assessment of inflation within the economy. For instance:The Bank of Zambia’s Monetary Policy Committee lowered the policy rate by 225 bps to 9.25 percent on May 19and by 125 bps on August 19 to mitigate the adverse impact of the pandemic. The plans to supply 10 billion kwacha (3.1 percent of GDP) of medium-term liquidity support to eligible financial services providers, and also proportion open-market operations to supply short-term liquidity support to commercial banks.