Monetary policy making is the act of any national monetary authority of a country to establish the size and rate of growth of money supply and, therefore, influence the interest rates in promoting a nation’s economic growth and stability…
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These actions may include increasing bank interest rates or decreasing the supply of money in the economy. The chief aims of such monetary policy are currency stability or price stability, achieving full employment and economic prosperity of a nation (Zettelmeyer & Zettelmeyer, 2003). Monetary policy rests on the correlation between interest rates of an economy and the total supply of money in the economy. It is natural that governments play a primary role in economic growth and stability through monetary policy especially in small rich economies. By creating monetary policies, central banks can influence the intensity of the supply of money on credit in the economy and, therefore, minimize extreme price fluctuations and improve economic growth. This control is made easier through clear knowledge of the monetary exchange rate that a country chooses to adopt (Jung, Choi & Jung, 2003). Relevance of exchange rates in monetary policy making Concisely, exchange rate refers to the rate at which one country’s money can be changed for another, that is, the price of one country’s currency in another country’s currency. Exchange rate is used when converting one currency to another or for engaging in foreign exchange market. The factors that influence exchange rates include political stability, inflation and interest rates. Nevertheless, exchange rate can, by itself, influence certain factors such as inflation and policy formulation and implementation (Ireland, 2008). For small economies and certain medium ones that are still very open to capital flows and trade, any changes in the value of exchange rate have a vital influence on the real economy or inflation. For successful pursuit of macro-economic stability and achievement of sustainable growth, prudent choices of exchange rate regime and appropriate policies are imperative (Ireland, 2008). The exchange rate and price stability of a nation's monetary value define its economy. Iceland, for example, although is a small country, has enjoyed a long period of stability of economic prosperity with unemployment falling to near zero level. Iceland is an ideal and extreme example of a small open economy. Iceland has a population of 300,000 with a GDP of 8.5 billion USD. Like other economies, Iceland also faces trade and economic problems such as market fluctuations and terms of trade that makes it vulnerable. However, Iceland is endowed with a huge chunk of natural resources with a highly educated labor force and well established economic policies. The paramount indicator of stern overheating of an economy is inflation and Iceland picked it (Breedon, Petursson, & Rose, 2011). However, the key to controlling inflation is good management of the exchange rate and its coordination with fiscal policy (Jung, Choi & Jung, 2003). Several available models of exchange-rate determination entail an unambiguous effect of monetary policy. According to Argy, Grauwe and Polak (1990), this is explained in terms of money aggregates on the exchange rate where any increased rate of monetary growth in one country, against the surroundings of a stable claim for money tends to decline the nominal exchange rate. Most theoretical models predict that, in the end, an increase in one country’s money growth wholly reflects in the price level with the relative increment in the latter counteracted by depreciation of the exchange rate. When implementing a monetary policy care must be taken to ensure that the taxpayers do not lose much of their money (Zettelmeyer & Zettelmeyer, 2003). In the long run, countries with moderately rapid money expansion will lean towards having high nominal interest rates, as well as high inflation. However, in short
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Although pegging the Chinese Yuan against the US dollar could somehow protect the business people from exchange rate volatility, we cannot deny the fact that pegging the Chinese Yuan against the US dollar could trigger long-term economic consequences due to high inflation rate.
The UK government wants to gain macroeconomic stability via its fiscal policy, which is made to aid the monetary policy in ‘smoothing the path of aggregate demand over the economic cycle’ and in providing long-term growth and curb over inflation.
This model is among the most popular standard macro models that explains different characteristics of an open economy. An open economy is an economy in which a country trades with other countries in goods, services, and financial assets (Redseth 2000). Most of the economies in the current world are open due to globalization of trade.
After the emergence of privatization associated with the globalization and liberalization of the world economy, the powers of the public and private authorities in the economies have changed down the years. The introduction of the classical dichotomy in the macroeconomic environment was responsible for the segregation of the monetary and the fiscal authorities of different economies (Pirounakis, 2013).
Its main benefit arises from the reduced interest rates and expansion in money supply. In this context, the focus is Germany; a large country with a dynamic system of open market and economy that is both affected and influences the foreign market through international intense competition in the mobile capital, technology and world products in the market.
l is a key part of the approach to this question, it is used in the context of small economics that have significant trade and capital flows with other countries. please structur ethe explanation of teh scenarios outlined in the quote and particularly the workings of fiscal and
ver, in a fixed rate administration, one of the two nations, with the agreement of the other, situates the exchange rate and allows its money distribution to adjust to suit to the level needed (Barro, 2008). Furthermore, in flexible exchange rate administration, the government
Foreign exchange risk is the risk that investments or rather an assets, goods and services dominated in foreign currency will lose the value as a result of unfavorable movements in the exchange rates between the foreign currency and domestic currency affecting the product or service in question.