Question

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1. What are some of the measures -and their limitations- that a central bank can take to defend the currency of that country that is coming under sustained downward pressure in the foreign exchange markets?

Answer 1

A central bank regularly mediates in outside cash markets and adjusts the degree of money request and flexibly to keep up the conversion standard at a particular level. It does this by purchasing and selling up outside money saves. There is descending weight realized by an expansion in the interest for the outside money because of an increae sought after for imports, this makes an abundance gracefully for the local cash since when customers purchase imported products, they offer local money to purchase up remote cash as the imported products are estimated as far as remote money. To forestall the swapping scale from falling beneath the fixed rate the central bank sells remote cash stores to purchase up local money, which expands the interest for residential money and makes upward weight. By reinforcing the residential cash and debilitating the remote money the descending weight is counterbalanced and thus the swapping scale stays at its fixed worth. The impediment of these measures is that fortifying residential cash makes trades less serious.

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