Quiz 20: Government Policies Toward the Foreign Exchange Market

Business

The difference between Adjustable peg and Crawling peg are explained as below: 1. Adjustable Peg System: It is the in which member countries fix the exchange rate of their currencies against one particular currency. The exchange rate is fixed for particular period of time. However, a currency can be repegged at lower rate (known as devaluation) or a higher rate (known as revaluation) under certain circumstances even before the expiry of the fixed period of time. 2. Crawling Peg System: This system is a midway between dirty floating system and the adjustable peg system. According to this system, a country specifies the parity value for its currency and permits a small variation (+/- percent) around that parity. The parity rate is adjusted regularly as required by the international reserve of the country changes in money supply and changes in the prices.

Yes, I agree with the statement that has been mentioned in this question because Every countries government often have other reasons for opting policies toward the foreign exchange market. A government of a country may want to keep the exchange-rate value of its currency low, preventing appreciation or promoting depreciation. This benefits certain activities or groups in the country, including the country's exporters and import-competing businesses. In a different setting, a country's government may want to the opposite: keep the exchange-value of its currency high, preventing depreciation or promoting appreciation. This can benefit other activities or groups -for instance, buyers of imports. It can also be used as part of an effort to reduce domestic inflation by competitive pressure of low import prices. The government may believe that it is defending national honor or encouraging national pride by maintaining a steady exchange rate or a strong currency internationally. Devaluation or depreciation may be feared as confirmation of the ineptitude of the government in selecting policies.

a) Official reserve transaction will be done in the foreign exchange market to defend the pegged exchange basically these are the transaction which has been done by central bank of a nation that cause change in official reserves of the nation. Where a country used to purchase or sale its own currency in the foreign exchange market in the exchange for foreign currencies or other currency denominated assets. In the balance of payments, the purchase of its own currency is to be shown in credit side and while on the other hand a sale is in debit side. b. The government can impose some form of exchange control to maintain or attract the rate of exchange with the help demand or supply of foreign exchange in the market. Similar to the approach would use trade controls such as tariffs or quotas to attempt to accomplish this result. c. The government can change domestic interest rates to attract inflow of capital in short-term, thus maintaining or attracting the exchange rate by changing the position of demand and supply in the market.