Expansionary Monetary Police Adopted by Chinese Government - Assignment Example

International economics Student’s name Institution affiliation Due date Question one When we talk of quantitative easing we mean those policies that are meant to ensure that there is expansionary monetary policy. An expansionary monetary police that the Chinese government will adopt will automatically lead to increased money supply to the economy. Increase of money leads to a decreased rate of interest that on the long term will lead to the decrease of interest rates in the United States. When the interest rates will fall in the United States, then the currency in this country will depreciate leading to currency outflow from the country. In return, the depreciation of the US dollar will lead to the Chinese Yuan appreciating. The scenario where there will be increased currency outflow will lead to increased supply of the US dollar in the foreign currency market. Due to the appreciation of the Chines Yuan, the exports from China to the United States will decrease, while those from the US to the China will increase. As a result of this scenario, then there will be an increased trade deficit between the United States and China. These will result to the weight of the Chinese foreign reserve be eroded making the value of the reserve be eroded hence making the weight of the US dollar be felt even further. To reverse the situation, then it will be necessary that the Chinese government will purchase the US dollar from the currency market. The situation will lead the supply of the Chinese Yuan increase in the currency market hence making it to depreciate. Exchange rate S dollar e2 A S dollar 2 e1 B Q1 Q2 Quantity As shown in the above diagram when the exchange rate is lowered, the supply curve shifts to the right (from S dollar to S dollar 2). This results to the increase of the amount of money in the market. Since the quantity shifts from Q1 to Q2. This is an indication that the observation is true hence the impact discussed above will be real. With increased quantity of the amount of Chinese Yuan in the market we will observe a decreased rate of exchange which goes hand in hand with the quantity of money that will be available in the exchange market. The above effects will be felt if the government of China puts in place those measures that are going to respond positively as explained in the above results. However, if the conditions are not met it is possible that the results are contrary to what we have seen above. For all these to happen it is necessary that the law of demand and supply in the foreign market to be maintained and its conditions to apply without having any other disturbance. These will result to the weight of the Chinese foreign reserve be eroded making the value of the reserve be eroded hence making the weight of the US dollar be felt even further. To reverse the situation, then it will be necessary that the Chinese government will purchase the US dollar from the currency market. The situation will lead the supply of the Chinese Yuan increase in the currency market hence making it to depreciate. Another problem that may lead to the cause of the devaluation of the Chinese currency is ensuring that the debt that the country has is manageable so that it may not be required to the government to give out a lot of Yuan as a way of settling debt. This also will affect the strength of the Yuan in the foreign market exchange. Interest rate is an important factor that will determine the rate at which a given economy will grow. Interest rates are key when it comes to savings and investments that are made in a country. When the interest rates are higher, it means that the cost of capital within an economy will be very higher. This means that the investors will be getting higher returns from the investments that they make in the economy. This means that the rate of investment will increase due to increased returns to the customers. However, the growth of the economy will be slowed, as may will not have the ability to get capital for consumption. The rate of consumption at higher interest rate will be slowed, as the ability to acquire capital will be lowered. Also the cost of capital will be higher something that will discourage most of the individuals from borrowing to spend. However, when the rate of interest is low most of the individuals will be able to borrow and spend. So this will lead to an increased level of spending in the long run. However, this will discourage investment, as the level of return will be reduced Question two C=10000+0.6Y I=2000 G=5000 X=600 M=400 C = 10000 + 0.6(2000 + 5000 + 600 + 400) = 17840 = I/ 1- MPC = 1/ 1-17840 a) multiplier = -0.000056 b) short run equilibriums = 12540 Question three a) When the strength of a currency falls it will lead to a country having its products being cheaper than those in other countries. This will lead to many of its products being bought. This means at the end the capital flow of the foreign currency into the country will increase. Increase of money leads to a decreased rate of interest that on the long term will lead to the decrease of interest rates in the United States. When the interest rates will fall in other countries, then the currency in this country will depreciate leading to currency outflow from the country. In return, the depreciation of the other currencies will lead to the Thailand’s baht appreciating. The scenario where there will be increased currency outflow will lead to increased supply of the currencies in the foreign currency market. Due to the appreciation of the Thailand’s baht, the exports from Thailand to other parts of the world will decrease, while those from other parts of the world to the Thailand will increase. As a result of this scenario, then there will be an increased trade deficit between the other countries and Thailand. These will result to the weight of the Thailand foreign reserve be eroded making the value of the reserve be eroded hence making the weight of the other foreign currencies will be felt even further. To reverse the situation, then it will be necessary that the Thailand government will purchase the other currencies from the currency market. The situation will lead the supply of the Thailand’s baht increase in the currency market hence making it to depreciate. All these will lead to capital flow between Thailand and the rest of the world depending on the course of action that will be taken next. b) The government of Thailand has to undertake some measure that can make the economy recover from the dip that it had taken. Though at the beginning some policy makers in Thailand were in denial that there was an economic crisis, at the end they started to appreciate, and actions were taken. The first action was to decrease the government expenditure. The decrease in expenditure meant that the supply of the Thailand currency would be reduced. This could make it difficult for traders to access this currency in the result some institutions could use international currencies in offsetting payment something that could reduce the pressure on the Thailand currency. Several developmental projects in the economy were stopped so that the government could reduce the amount it paid out to contractors and imports for machinery required in undertaking such projects. Also, taxes on exports were reduced so as to increase the number of commodities being sold abroad. This could to increase in foreign exchange earning which in return could reduce pressure on the Thailand currency. On the other hand, the tax on imports were revised upwards to discourage imports which could make the demand of the currency reduce resulting to eased of the pressure felt on the currency and at least improve its performance in the foreign market. In addition to the above measures, the interest rates within the country were revised upwards as a measure of containing the rising of inflation in the country. When the rate of interest is higher it means most of the consumers will not afford to take loans that they will use in purchasing goods and services. When this is done it means supply of money in the economy will reduce and the demand won the currency to will reduce. This will lead to easing pressure on the currency. Other actions like reducing the cost of capital was undertaken by the government. All these actions could lead to improve the rate of exchange that could exist in the Thailand currency exchange. The actions mentioned above could lead to a prevention of the free fall of the currency that was being experienced in the Thailand currency. However, regardless of all these close examination of the causes of the free fall should be undertaken to identify the specific factors. Read More