International finance - Assignment Example

International Economics and Finance a. As much as devaluation has been embraced as a strategy to improve competitiveness of a country in the currency wars, it is associated with increased inflation in the end. As such, devaluation reduces the purchasing power of citizens when they chose to travel to foreign countries and also when they purchase imports as the imports become expensive (Hollenbeck). In addition, it is evident that devaluation can contribute to added inflationary pressure. Case in point, with devaluation, the payment of international debts could be highly expensive if the foreign currency is to be used as a denomination of the debt.

This could lead to reduced investments of the government or organizations involved in the debt, thus leading to adoption of compensatory mechanisms such as increased taxation by governments and increased product prices by organizations in order to cater for the cost. On the other hand, devaluation is likely to discourage investors from foreign countries, as governments that devalue their currency are perceived as weak. This would lead to decreased revenue and thus high rates of inflation. b. I) The growth rate of national income is higher in Japan than in the United StatesAn increase in national income in Japan as compared to the US, with floating rates of exchange would lead to the depreciation of the rate of current exchange for Japan, and thus appreciation of the US dollar. II) U.S.

wages rise relative to Japanese wages, while American productivity falls behind Japanese productivityIncreased wages in the US with low productivity would lead to the depreciation of the US dollar, as there is no produce to buy with the money. III) Prices in Japan and United States are rising at the same rateAn increase in the prices in both Japan and the US would ensure that the two countries maintain their purchasing power parity. As such, the US dollar would remain the same relative to the Japanese yen. IV) Real interest rates are higher in Japan than in the United StatesHigh real interest rates in Japan would lead to appreciation in the value of their currency and subsequent depreciation in the value of the US dollar.

As such, global investors would wish to hold financials in the Japanese yen. For them to buy Japanese stocks or bonds, the Japanese yen must be bought, causing it to appreciate. V) Japan imposes import duties on goods imported from the U.S. and U.S. does not retaliateBy imposing duty on imports from the US, the US dollar would depreciate as individuals within Japan are drawn more towards the cheaper local produce. 2) a. The fixed exchange rate system guards countries from exchange rate uncertainties by allowing countries that experience deficits in the payment balance to use their dollar reserves to finance such deficits (Arnold 891).

With the decline in the number of dollars, the supply of money in the country is reduced. The interest rates thus increase in response to the reduced prices. The reduction in price results in the goods of the nation becoming more competitive at the international level, increasing capital flow into the nation. As such, the fixed exchange rate system allows different nations to establish equilibrium through balancing payments. b. The fixed exchange rate systems place the exchange risk of imported goods from the importers.

This leads to a reduction in their demand for goods from foreign countries, an aspect that would lead to a decline in the prices of goods that are traded internationally. On the other hand, the rate of exchange may rest upon the exporters, forcing them to include a risk premium to the production costs, which is reflected in the final selling price of the exports (Arnold 892). As a result, this leads to increased inflation in the constituent countries sharing the same system. Work CitedArnold, Roger A.

Economics. Boston, MA: Cengage Learning, 2014.Hollenbeck, Frank. Bad Idea: Devaluing Currency to Help Exporters. 13 February 2015. 18 March 2015. .