Question

1) Explain what the world bank and the IMF are and the goals of both?

2) What are a fixed exchange rate and a floating exchange rate?

3) If the US Federal Reserve Bank increases the money supply, what happens to the value of the US dollar and the exchange rate?

4) If the US government increases the deflect and the Federal Debt, what happens to the value of the US dollar?

5) When did the US go off of the Gold Standard?

6) Explain the Trilemma.

7) Assume that there is a fixed exchange rate is overvalued, what can the central bank do to defend the currency?

8) What is the difference between a spot and forward exchange rate?

9) What is the current value of the euro and yen exchange rate?

10) If the Euro depreciates relative to the dollar, are American goods more or less expensive? Why?

Answer 1

Answer 1World bank and IMF

The main goal of IMF to bring the certainty towards international monetary and fiscal system. The object of IMF is to bring about effective solution in the matter of crisis period and promote the effective growth plan and its execution to the member countries along with alleviation of poverty.

The main goal of World bank is to alleviate the extreme poverty in the incoming period and to lessen the percentage of population by implementing effective program and to promote a suitable measurements to ensure the development of growth of the people belong to the society.

Answer 2 Fixed exchange rate is the nominal exchange rate and floating rate is determined in foreign exchange according to the demand and supply

Answer 3.

If the demand level remains unchanged and the supply of money increases if affects the interest rate and due to excess supply of money in the market the interest rate falls as there lies an inverse relationship between supply of money and interest rate.

Since interest rate becomes lower for the excess supply of money when demand is unchanged the rate of return on investment also decreases. Therefore, to achieve higher rate of return from the investment the investors search such area of investment where they will earn more return. Now when in a country the interest rate falls the rate of return according to the previous explanation also decreases which make the investors to choose such investment where more rate of return can be earned. When in any country such type of situation arises it creates less demand for the currency and the worth of currency of any country is measured by exchange rate so when exchange rate falls the worth of currency also falls

If the supply of money increases in the US the exchange rate falls and the dollar value depreciates. It affects the export and import prices. The export price will fall and the import price will increase.

Q4

If the US government increases the deflect and the Federal Debt, what happens to the value of the US dollar?

Answer 4

When the US Government increases the Federal debt the economy will start to go slow as the US treasury in such a situation ought to increase the interest rate which will create pressure on the dollar value and the dollar price decreases.

However when the deficit spending increases it boosts the growth of the economy and the dollar value rises in such increase.

Question 5.

When did the US go off of the Gold Standard?

Answer 5

In 1971 the US Government stopped to sell the gold to those foreign officials who were the holder of dollars.

Q6. Explain the Trilemma

It is a subject matter of international economics. There are three important components are found in the economy. These are fixed foreign exchange rate, free capital movement and independent monetary policy. The concept of trilemma refers that these three economy factors cannot be present together at any point of time. Whenever it is tried to keep the three components together such attempt goes fail.

Q7

Assume that there is a fixed exchange rate is overvalued, what can the central bank do to defend the currency?

When the fixed exchange rate is overvalued it decreases the demand of domestic product as the situation creates increase in import and t the same time the export will be expensive.

To keep the exchange rate undervalued the central bank can purchase the foreign exchange assets which at a certain point of time in the future will balance the overvalued exchange rate. It is a mechanism to downward the value of the currency relative to another country’s currency rate.

Q8. Difference between spot and forward exchange rate

In case of spot exchange rate the settlement of fund occurs on the second working day from the date of contract.

On the other hand the settlement date of forward exchange rate can be done on any day except the date of spot.

The forward rate can be either higher or lower than spot rate but cannot be same.

Q.9 Current value of euro yen exchange rate

It is 121.71 Japanese yen

Answer 10

When euro depreciates relative to American dollar the American goods will more expensive. It is because the value of dollar appreciates relative to euro dollar so the export price of the American goods increase.