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Why is the simultaneous targeting of the money supply and interest rates sometimes impossible to achieve? How do central banks intervene in foreign exchange markets? What did the Bretton Woods Agreement do to the ability of foreign exchange rates to fluctuate freely?

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Joshua Stredder
Joshua StredderLv10
28 Sep 2019

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Related questions

The Venezuelan bolivar has been steadily depreciating against the US dollar, but the government wishes to stop the depreciation. What must the Banco Central de Venezuela do to stabilize the exchange rate? Is there a limit to how much it can intervene in the foreign exchange markets?

Assume the central bank engages in aggressive open market purchases in an effort to stimulate the domestic economy. The nation has flexible exchange rates and the central bank does not intervene in the foreign exchange markets.

a) The change in R causes foreign money to flow (into or out of) the nation. This causes the domestic currency to (appreciate or depreciate).

b) The combined effect of changes in R, PI and RGDP causes the domestic currency to (appreciate or depreciate).

c) The depreciation of the domestic currency will tend to (increase or decrease) exports and NE but the changes in PI and RGDP will (increase or decrease) NE. The net result will be an (increase or decrease) in NE.

d) NE will tend to (support or oppose) the goal of stimulating the nation’s economy.

Decide whether the U.S dollar would appreciate or depreciate compared to the Mexican peso in each scenario. Assume flexible exchange rates.

1. American tourists head to Mexican beaches for the spring.

2. Mexico's money supply drops sharply.

3. Taxes on corporations in the U.S are cut. They are now lower for business investment than Mexico.

4. Drug violence discourages Americans from traveling to Mexico.

 

23. The basic type of intervention by central banks under the managed floating exchange rate system is to:

A. The central bank or government simply changes the peg for exchange rates.

B. Buy and sell currencies to influence supply and demand.

C. Renegotiate the rate at which foreign currencies can be converted into gold.

D. Make pronouncements but then do nothing and let the market set the exchange rate.

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