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Foreign Exchange - Essay Example

Under the system, other than U.S, other countries central banks were assigned the task of maintaining a fixed exchange rate between the dollar and their respective currency. This would be done by intervening in the market of foreign exchange. The system lasted up to 1971. Inflation in the U.S and the trade deficit were undermining the dollar value. The U.S abandoned the system allowing the dollar to ‘float’ instead of fixing it. The current system is stable as it provides for variables like trade deficits and inflation. The dollar is fived by the markets. However, depreciation, which causes a rise in prices in the domestic markets, will destabilize the system.
What is foreign aid and what is the goal of foreign aid? Does foreign aid promote economic development? Explain briefly Foreign aid is described as the international transfer of services, goods, or capital from an international organization or country for the benefit of another country (McEachern, 2012). Foreign aid can be in form of military aid, humanitarian aid or monetary aid. The goal of foreign aid is to help countries in need to increase their capabilities of achieving their goals. Foreign aid is intent on helping countries receiving help improve their ability to be secure, defend their borders, or improve trade. To some extent, foreign aid does promote economic development. ...
Foreign aid will also free up some of the countries spending and it can be directed towards development projects. Question 3: Why can’t all the

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balance of payments accounts be in surplus? What factors determine the demand for British pounds in foreign exchange markets? How are exchange rates determined under a flexible exchange rate system? Imbalance in a country’s balance of payments is caused where payments a country makes are less compared to those received. This is what that is termed as a favorable balance of payment. However, there are consequences caused by factors like production, unemployment, and inflation. A balance of trade surplus is the cause of balance of payment surplus. However, other payments will turn a balance of trade surplus to a deficit. This means not all balance of payments accounts will be surplus. The British pound will be influenced and determined by a number of factors with respect to the foreign exchange markets. If the British inflation is relatively low, exports will be more competitive driving up the demand for the pound. If the British interest rates raises, relative elsewhere, Britain becomes more attractive to deposit. This will increase demand for the pound. Demand will also be determined by balance of payments, government debt, and relative strength of other currencies. Question 4: How can two countries both be better off as a result of trade? How can tariffs protect U.S. Jobs? Do tariffs lead to a net increase in jobs? Explain. Who are the winners and losers from trade restrictions? Give that trade restrictions impose losses on an economy, why are trade restrictions so common? Countries will be better off as a result of trade if they use it to enhance domestic competitiveness. Competition will result in


Some think the current system of managed but floating rates is too unstable. What would generate the instability? The Bretton Woods system is a landmark system designed for monetary exchange rate management that came to play in 1944…
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