Question

Look at this information:Shortly after Blades began exporting to and importing from Thailand, Asia experienced weak economic conditions. Consequently, foreign investors in Thailand feared the baht’s potential weakness and withdrew their investments, resulting in an excess supply of Thai baht for sale. Because of the resulting downward pressure on the baht’s value, the Thai government attempted to stabilize the baht’s exchange rate. To maintain the baht’s value, the Thai government intervened in the foreign exchange market. Specifically, it swapped its baht reserves for dollar reserves at other central banks and then used its dollar reserves to purchase the baht in the foreign exchange market.

1. How would these transactions affect the value of the baht (appreciate or depreciate), and why? Will inflation or deflation occur?

Answer 1

Ans - In slowdown Baht value has been depreciated due to selling pressure of Baht. But to curb this situation, the Thai government has intervened in the foreign exchange market by purchasing its own domestic currency.

When Government purchase its own currency its currency value appreciate. The reason behind is very simple i.e demand / supply rule. When demand is more than supply, the price increases and vice versa.

When the Thai government is selling dollar reserves and buying their own currency, its value increases or appreciate and the value of dollar depreciate.

And when the government is purchasing its own currency in the market, the deflation will occur. Because when Thailand is facing huge selling pressure from foreign investors and there is more supply in the market that will cause inflation. To curb that situation the government will purchase its own market and then deflation occur. Inflation occur when there is more money supply and due to that people of that country has more money, so they demand more and more inflation will occur in future, So in that case govt intervene in the market and purchase its own currency