Finance Assignment Help

The solution presented exhibits the finance assignment help offered by us. We have analysed the effects of real exchange rate and GDP in case of exogenous increase in payments. This is analysed with regards to Mundell Fleming model which is an extension of IS-LM Model. BoP curve is represented in an economy on a short run to analyse the situation as explained in our finance assignment help solution. IS curve is used to represent the combinations of interest rate and real national income for which the money market is in equilibrium. The finance homework help solution shows the variables used to represent IS curve wherein NX represents the national net exports. LM curve i.e liquidity -money is a representation of interest rate and income equilibrate the money market, given the economy’s price level and nominal money supply as given in our finance project help solution.

  1. Consider the case of an exogenous increase in payments into a country.In a Mundell Fleming model , what will be the effects on a country’s nominal and real exchange rate and GDP.

The  model is an extension of the IS-LM model. The most important difference between the two models is related to the ‘’open economy assumption”. So, if the IS-LM model is placed in a closed economy, the  model (IS-LM-BoP) is placed in an open economy, that is way the representation includes an additional curve: BoP (balance of payments). Being an open economy the capital has perfect mobility that is why BoP curve will be represented horizontally, parallel to the Y axis.

Both IS-LM and  model analyze the situation in an economy on the short run.

The IS curve is a representation of all the possible combinations of the interest rate and the national income for which the real economy is in equilibrium (the equilibrium points from the market of goods and services – the real economy). The IS curve is represented finance assignment help with a negative slope because it is determined taking into account the multiplier and elasticity of Investments to internal interest rate.

The equation which explains the IS curve is represented by:

Y= C(Y-T) + I(i) + G + NX(e),

where the used variables are:

Y – National income (GDP)

C – Consumption

T – Taxes

I – Investments

i – Interest rate

NX – the total National Net Exports (NX = Exports – Imports)

e – Nominal Exchange Rate

Knowing the composition of the IS curve finance homework help we can state that it be shifted to the left (a decrease) or right (increase) with changes operated in G(public spending), Y(national income), C(consumption), or real exchange rate.

The LM curve is a representation formed from all the combinations of the interest rate and the national income for which the monetary sector finance assignment assistance (that part of the economy formed of assets, institutions, and financial markets, including the demand and supply of money) is in a state of equilibrium. The shape of the LM curve is an upward slope because finance assignment help online an increase in income generates an increase in money demand. Since usually the increase of the money demand is faster than the increase of the quantity of money on the market, the interest rate will increase as well. The magnitude of LMs slope depends of the elasticity of money relative to the interest rates. A low value of the interest rate will be followed by quite steep.

The LM curve is explained by:

= L (i, Y),

where the used variables are:

M – Nominal money supply

P – The level of prices

L – Level of liquidity

i – Interest rate

Y – National Income

The essential assumption of the  model is that the economy is small and open with a perfect mobility of the capital. In countries with Online finance tutor perfect mobility of capital the assets can be traded externally without any restrictions. The low costs of the transactions and the large quantities that can be sold will encourage the traders to search externally for high revenues or for low borrowing costs. The immediate result, because the finance project help amount of capital is limited, would be the tendency of equalizing the interest rates. With extremely different interest rates the capital flows should be infinite.

Of course, that in reality not all the situations are like this. There are event today countries in which the capital flows are controlled blocking the flows.

The Balance of Payments and Capital Flows (BoP) is a representation of the transactions between one country and the rest of the world.  To calculate the BoP in its financial management assignment help simplified form we use to main accounts: current account surplus (records trade in goods, services, and transfer payments) and capital account surplus (records the trade in assets). If a flow of money enters in a country we have a credit item – it is entered with a help with finance assignment plus sign. If a flow gets out of a country we have a debit item – we note the item in the account with minus. The BoP curve is explained by:

BoP = CA + KA,

where the used variables are:

BoP – balance of payments

CA – Current account surplus

KA – capital account surplus

In addition to this form of the balance of payments, we can note that the inhabitants of a given country must always pay for the products help with finance homework bought in other countries, so that the deficit in CA (current account) must always be compensated by a change in the capital flow (KA). We can conclude that the relation takes the following shape:

BP = CA + KA = 0 (equilibrium)

In principle, as we can see in the following table the policies in the finance project help monetary, fiscal and commercial field have different effects upon the values of Y, e and NX.

Table 1.1 – Policy effects

Policy Floating (flexible) Fixed
Impact on Y e NX Y e NX
Fiscal expansion 0 Increase Decrease Increase 0 0
Monetary expansion Increase Decrease Increase 0 0 0
Import restriction 0 Increase 0 Increase 0 Increase

Source: adapted after Rode, Sanjay – Advanced Macroeconomics, Venus Publishing, p. 107.

For example, if a country with floating exchange rates expands its taxes, Y will remain 0, the exchange rate will increase and the net exports help with finance assignment will decrease. A country with fixed exchange rates will experience an opposite situation, the national income will increase but the nominal exchange rates and the net exports will remain identical.

Of maximum importance for us in this situation is the fact that in an economy with fixed exchange rates, in which the Central Bank intervenes, the change of the monetary mass has no effect on the values of national income, nominal exchange rates and net exports. So, in a country which uses sterilized or unsterilized intervention to adjust the monetary mass the finance assignment writing help initial equilibrium point will be restored. This situation could be extended by the Central Bank for as long as its reserves allow the intervention on the market.

Another general observation that we can make regarding the nominal exchange rate (e) is that: under fixed exchange rate the LM curve shifts at any change of e and that if the exchange rates are flexible the LM curve is not affected by e.

An important condition which must be also meet for a  model is the Marshall-Lerner condition (sometimes called finance thesis help Marshall-Lerner-Robinson after three economists who developed it independently). This condition analyzes when a real depreciation of the currency (in fixed or floating exchange rates) improves the current account balance of a country. In other words the Marshall-Lerner condition is fulfilled when the depreciation of a financial management homework help currency allows a country to increase its exports by the increase of their relative competitiveness.

The Marshall-Lerner condition is fulfilled if the sum of price elasticity of exports and imports is larger than 1 (PEDX+PEDM > 1). If the sum is larger than 1 a government can choose to depreciate the currency to obtain an improvement of the current account. If the sum is less than 1 (PEDX+PEDM < 1, case in which the Marshall-Lerner condition is not fulfilled) the government can choose a revaluation (not a devaluation) to improve the current account.

Figure 1.1 – BoP shape for countries which depreciate their currencies

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If a country which records imports which are higher than its exports chooses to depreciate its local currency, the shape of its Balance of Payments will finance assignment help be like a J curve. In the first phase, the imports are higher than the imports, and the sum of elasticity’s is less than 1. In time, due to the depreciation of the currency the exports of the country become more competitive and grow relatively to the imports (the balance of payments shifts in an area where the Marsall-Lerner condition is fulfilled) and the country obtains, once again a surplus from exports.

For our model we assume that the Marshall-Lerner condition is fulfilled, so that the sum of price elasticity’s is higher than 1, meaning that (according to figure 1) the tendency of exports (relative to imports) is one of improvement.

The Marshall-Lerner condition represents an element of interpretation by which the  model can be criticized. The  finance homework help model assumes in theory that the Marshall-Lerner condition is fulfilled even on the short run, a period of time in which, most probably, the Marshall-Lerner condition cannot be satisfied (because the trade trends of goods’ are inelastic).

In the following part we will analyze the evolutions encountered on three different markets: one with flexible exchange rates, the second with fixed exchange rates in the condition of a sterilized intervention of the Central Bank and the third with fixed finance assignment help exchange rates with unsterilized intervention from the Central Bank. For each scenario we will analyze and explain the effects related to the different motilities of capital: high capital mobility, low capital mobility and perfect capital mobility (which represents the general case considered in the original model).

If we consider the case of an exogenous increase in payments in a country, this means that is an influx of foreign payments from outside the country (most probably through exporters, who bring a significant amount of money in their domestic economy selling their products outside the national borders).Exogenous means that it takes place throughout the external channels, which are not directly related to the internal macroeconomic variables. This exogenous increase in payment signifies, in the last instance, that the monetary mass of a country changes, because it becomes larger. It is an increase in the money supply, which affects the LM curve.

Exogenous increase in payments signifies that the payments in our country became larger due to an influence of a factor which is outside the borders of a local economy.

The IS curve would be affected if the government would increase its expenditures (this fact does not apply in this case, since the increase is exogenous, namely from outside the country).

The BoP curve would be affected in the case of an increase in the global interest rate. The increase in payments is not necessarily synonymous with finance homework help the increase in the interest rate, because we can have an influx of monetary mass even when the interest rates (global and domestic) remain the same. In our case, the change in these two variables is an effect of it, as we will see when we will present the cases. We have a capital inflow of foreign currency (due to a boost of exports), which ultimately will transform in a capital inflow of national currency. The domestic interest rate in this case will fall and will be smaller than the global interest rate. This situation will be the same in the case of an increase in the global interest rate compared with the national interest rate. LM is the most sensitive element in the Mudell-Fleming Model, because it reflects instantaneously the changes on the money supply on the market. Immediately after the change of the money supply (increase or decrease), the monetary mass modifies in the same sense. This is why we have assumed that in first instance the LM curve changes its position.

So, the case of an exogenous increase in finance assignment help online payments is synonymous with more money in the national economy. This situation can be caused by several factors (an increase of the exporters or a decrease of the national domestic rate of interest compared with the global one which will make the country more attractive for the investors). The first effect of this exogenous increase in payments is reflected in first instance by an augmentation of the monetary mass (due to external factors) which will have furthers effects on LM, BoP and IS. We construct our argumentation by assuming that the monetary mass becomes larger. In this scenario we will analyse the effects on the three curves of the  Model. We have more money into the domestic economy.

The considered situation – an exogenous increase in payments in a country – can be reflected in a first instance by a shift of the LM curve, with further effects on BoP and IS curves. This is why, all the analysed cases begin from a shift of the LM curve due to an increase of the money supply determined by an inflow of capital in the domestic economy.

Flexible exchange rates

A flexible exchange rate (or floating exchange rate) is a system in which the value of the exchange rate is determined by the meeting between supply and demand. The general assumption found in the specialized literature is that on a market under flexible exchange rates any monetary policy of a Central Bank is highly effective generating consistent changes in the final output.

The central banks allow the exchange rate to be determined by market forces and do not make active intervention on the market (by selling or finance assignments help buying the national currency in favour of a foreign one) to maintain the exchange rate at an established value.

Overall the flexible exchange rates and an expansion of the monetary mass will lead to:

A depreciation of the nominal exchange rate.

Also a depreciation of the real exchange rate (because in this case the Central Bank does not interfere on the market) since the price level is fixed (the level of the goods and services’ price is considered in this case fixed, on the economy, because we are analysing a situation on a short run, when the market does not have the time to shift the prices).

An increase of exports (if other countries don’t also use depreciation to increase their competitiveness).

An increase of the interest rate.

A higher level of domestic output (GDP or Y in our graphs) in real terms.

Since we analyze the same effect of an inflow on payments in a country, in each of the three analyzed cases (for perfect, high and low capital mobility) the effects remain the same, the only difference between them being in their magnitude.

In all the three cases, the effects (which can be observed from the first three graphic representations– Figure 1.2, Figure 1.3 and Figure 1.4) are:

LM shifts to the right due to the exogenous increase in payments as an expansionary monetary policy.

The surplus of money will determine an increase on the interest rate.

The national currency will devaluate and the IS curve will shift to the right (this means that the exports increase and the imports diminish).

The BoP curve will move to the right, excluding the finance assignment help case of the perfect capital when BoP is a horizontal curve parallel with the abscissa axis. The mobility of capital is determining the slope of this curve: the higher the mobility, the flatter the BoP curve and inverse.

Table 1.2 – Effects of an endogenous growth of the money supply (increase in payments) on the exchange rate (nominal and real) and GDP in the case of a market with flexible exchange rates

Capital mobility GDP (Y) enominal ereal
Low mobility Increases Depreciate Depreciate
High mobility Increases Depreciate Depreciate
Perfect mobility Increases Depreciate Depreciate

Figure 1.2 – Market with flexible exchange rates – for perfect mobility of capital

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We assume that, in the initial moment, we have a market with flexible exchange rates with perfect mobility capital. The equilibrium point on the market is finance term paper assignment help formed at the intersection of the three curves: IS, LM and BoP in the point E. The equilibrium point E has as corresponding coordinates an interest rate equal to iW and a value of the national income equal to YE.

Due to a good evolution of the economy finance homework help our country records a significant increase of exports comparative to the relatively constant imports. The higher level of exports will determine an increase of the quantity of foreign currency on the market. The exporters will exchange their foreign currency (at the local commercial banks and, indirectly at the central bank) for domestic currency, fact which will determine an increase of the currency exchange rate, and overall an increase of the internal supply of money.

If in a market with flexible exchange rates we encounter an increase of the monetary supply we will see the following effects: Firstly, the LM curve will shift to the right from LM to LM1 fact that will determine a change of the equilibrium point from E to E’. The new point of finance assignment help equilibrium is on the same initial IS curve (so the market of goods and services remains in equilibrium) and has as corresponding values a lower interest rate iL (caused by the surplus of money) and a higher value of the national income (YE’).

Here comes the interesting part. Because the economy is open and the capital has perfect mobility the lower interest rate generates an outflow of capital, with an effect in the nominal currency depreciation, but also a real appreciation since the price level is fixed. The depreciation of the currency will determine an increase in the relative competitiveness of the exporters, fact that will allow an increase of production which will determine the shift of the IS curve. The outflow will stop when the interest rate will reach again the initial equilibrium value of iW. The IS will shift until the capital outflow will stop, that will happen at the initial equilibrium value of iW, The new equilibrium finance project assignment help on the market will form between the BoP curve and the new LM1 and IS1 curves. In this point E’’ the exchange rates will not be subject of sudden change anymore.

The corresponding coordinates for the new point of equilibrium are iW (equal to the initial interest rate) and YE’’, a national income (GDP) higher than the initial value. It is remarkable that on a market with fixable exchange rates the long term tendency for finance term paper help the equilibrium is to return to the initial interest value.

Figure 1.3 – Market with flexible exchange rates – for high mobility of capital

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In a market with high mobility of capital the slope of the BoP curve is different. In this case it is not parallel to the y axis but it is slightly ascendant. In our case, we start from the same assumption, a market where the equilibrium is finance homework help formed at the intersection of the three curves IS, LM and BoP. The corresponding values for the equilibrium point E are iW and YE.

As in the precedent example we start from the assumption that the analyzed economy recorded a period with an overall increase of exports which has lead to an increase of foreign currency in the country (the exogenous increase in payments’ assumed at the beginning). The exporters sold the foreign currency to the local banks and determined an increase of the internal monetary supply. We know that, overall an increase of the money supply is very efficient in the stimulation of an economy with flexible exchange rates.

In the figure above we can see that an increase of the monetary mass determines a shift of the LM curve to the right from LM to LM1. This decrease determines a corresponding decrease of the interest rate, from iW to iL. The decrease of the interest rate finance thesis help makes the money cheaper for the investors. The entrepreneurs use the cheap money to increase their investments, generating a higher output of production and a shift on the IS curve from E to E’. The increase of production determines a correspondent increase of imports (because of the resources necessary to the process of production and because the worker earn more). Also, the decrease finance assignment help of the interest rate determines an increase of capital outflows. We can state that overall in E’ the balance of payments is in deficit.

Due to the fact that the balance of payments finance homework help is in deficit we do not have an excess of domestic currency on the foreign markets, fact that will cause a depreciation of the exchange rates, both in nominal and real terms (because, as we already stated the price level is fixed). In time the exports will be stimulated and the output will increase again. Both BoP and IS finance thesis help services curve will shift to the right at values higher than the precedent one. The new equilibrium point will form at the intersection of LM1, IS1 and BOP1 in the E’’ point. The national income (GDP) has increased (compared to the value of the initial equilibrium point). The corresponding values for the new point of equilibrium will be iQ and YE’’. Under this assumption, if the mobility of the capital is high, the monetary policy works more efficiently.

Figure 1.4 – Market with flexible exchange rates – for low mobility of capital

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In this case, in the initial moment, we have a market with flexible exchange rates, but a low mobility of the capital. The equilibrium point on the market is thesis help provider formed at the intersection of the three curves: IS, LM and BoP in the point E. The equilibrium point E has as finance assignment help corresponding coordinates an interest rate equal to iW and a value of the national income equal to YE.

The assumption for this case is similar to the previous one. After a growth of the exports (relatively to the imports) the exporters will have a higher quantity of foreign currency. They will sell the foreign currency to the local banks which will release an additional finance assignments help online quantity of the national currency. The increase of the monetary mass will produce a shift in the LM curve, which will move to the right from the initial position (and the initial equilibrium point) to LM1.

The balance of payment will be affected, since we are on a market with flexible exchange rates. The first reaction on the market will be, in this scenario, a decrease of the interest rate from iW to iL on the same IS curve to an temporary equilibrium point E’. In this point E’ BoP is in deficit. A main effect of this movement will be the depreciation of the national currency, both in nominal and real terms. The difference to other markets is related to the low finance assignment writing help mobility of capital. So, if on other markets a decrease of the interest rate would generate an outflow of capital, in this situation the decrease of the interest rate is not followed by a quick outflow of capital. As a result of this fact, the interest rate will remain at a lower value for a longer period. The low interest rate will make the capital available to the investors. The increase of the output will boost the exports, while the imports will be discouraged. This increase of the exports will generate a shift of the IS curve to the right, from the initial position to an intermediate one represented by the IS1. The increase of the international trade will generate a shift of the BoP curve to a new level represented by the BoP1 curve. In this situation the domestic assets are cheaper compared with the initial situation. The new equilibrium point will be now E’’, which has as corresponding values an interest rate iQ (higher than the initial value of iW) and a national income (GDP) YE’’ higher than the initial value of YE).

Fixed exchange rates with sterilization

Sterilized intervention takes place when a Central Bank from any given country buys domestic bonds. By buying bonds the Central Bank is releasing money on the market, offsetting the money supply. The Central Bank uses this method to balance the effects caused by the excess of money caused by the surplus or deficit of the Balance of Payments.

Because we has assumed an increase on the LM at the beginning by an increase of the payments, or of the monetary policy, this case have sense only if this finance dissertation help increase is under the point of equilibrium at which the Central Bank has established the value of the exchange rate (in the other case, this situation will no have sense, because the government cannot make larger the money supply).

The Central Bank intervenes actively on the market. By this, the government ensures that the changes in reserves due to intervention do not affect the national money supply.

Under the fixed exchange rate system with sterilization, the monetary authority operates in the foreign exchange market to maintain the specific exchange rate established. It buys domestic bonds and offset the money base.

Under a market with fixed exchange rates with sterilization and an expansion of the monetary mass will lead to:

In first instance:

A devaluation of the nominal exchange rate and also a depreciation of the real exchange rate, since the monetary base tends to increase (we are under the fixed rates established by the Central Bank).

However, the central bank offsets the money supply.

The level of domestic output (GDP or Y) in real terms does finance assignment help not have time to materialize (to increase).

On long run, because the intervention of the Central Bank:

The nominal exchange rate will come back to the initial point and will be established on the initial level. The nominal exchange rates are fixed in this system.

The real exchange rate can move even if the nominal rate is fixed, because in the long run, prices are flexible.

The domestic output (GDP) will remain unchanged (because the time period for the market is too short to react).

In all the three cases (for perfect, high and low capital mobility), the effects which are different in magnitude (and can be observed from the first three graphic representations – Figure 1.5, Figure 1.6 and Figure 1.7) are:

LM shifts to the right due to the exogenous increase finance homework help in payments as an expansionary monetary policy (because we are on a low level than the fixed exchange rate).

The national currency devaluates in finance homework help nominal terms and the IS curve tend to shift to the right.

The BoP curve tends to move to the right, excluding the case of the perfect capital.

The government intervention will shift the LM curve to its original position: neither IS nor BoP will change, or, if they will, this will be on a very short period of time because the Central Bank intervention is very fast.

Table 1.3 – Effects of an endogenous growth of the money supply (an exogenous increase in payments) on the exchange rate (nominal and real) and GDP in the case of a market with fixed exchange rates with sterilization

Capital mobility GDP (Y) enominal ereal
Low mobility Remains the same Remains the same May change
High mobility Remains the same Remains the same May change
Perfect mobility Remains the same Remains the same May change

Figure 1.5 – Market with fixed exchange rates (Central Bank uses sterilized intervention) – for perfect mobility of capital

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We assume we have a market on which the equilibrium (E) is formed at the intersection of three curves: IS, LM and BoP. On this market the exchange rates are fixed and the Central Bank uses sterilization interventions. As we can recall from Table 1, on the long term, on finance assignment help a market with fixed exchange rates the monetary policies have zero effect on the national income, the nominal exchange rate and the net exports. Practically the tendencies on the market will finally end with a return to the initial point of equilibrium E.

It is logical that on any market (with fixed or flexible exchange rates) any modification of the monetary supply will cause an inflow or outflow of capital until the monetary mass and the interest rate are restored to their original values. For example, if the imports of a country are growing faster than the exports the importing companies will buy internally foreign currency with national currency, fact which will cause a decrease of the internal monetary mass.

On our market we suppose, as in the other cases that due to exceptional exports the monetary mass inside our country grows at an unseen level. On our graphic the LM curve would shift to LM1 and a new point of equilibrium would form in E1. In this point there is finance assignments help a deficit reported to the balance of payments. And there is a possibility for the capital to outflow (the world interest rate is higher). To solve this problem usually the Central Bank would release some more money on the market

(by buying bonds) so that the LM curve could shift from LM1 to LM2. In this point there had passed enough time for the producers to raise their offer to IS1. Practically the Central Bank has devalued the currency to increase the exports of the country to reduce the deficit of the balance of payments. This strategy is not sustainable on the long term because the central banks from other countries will finance homework help react and restore the initial rate of change between the currencies. At the initial rate of exchange the exports will drop down (the IS curve will shift back to the left from IS1 to IS) and the Central Bank has to reduce the monetary mass to the initial size (or if it has enough reserves it can continue its strategy of devaluation).

As long as a Central Bank has enough reserves, any attempt to lower or increase the interest rate from the value iw is ineffective, on a market with fixed exchange rates and perfect capital mobility.

Figure 1.6 – Market with fixed exchange rates – for high mobility of capital

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In our example the equilibrium is formed at the intersection of the three curves: IS, LM and BoP. The intersection point E has, as corresponding values the interest rate iW and the national income YE. The mobility of capital on this market is high (the slope of BoP is positive) and close to the perfect mobility state.

Our present example starts from the assumption financial assignment help that a given country records an increase of its exports and a decrease of imports, fact which determines an inflow of foreign currency and an increase of the internal monetary offer. A increase of the internal money supply would normally shift the LM curve to the left from LM to LM1, to a new point of equilibrium E1 with the following corresponding values iL and YE1. In this point the economy is in finance assignment help `deficit regarding to its balance of payments. To solve this problem the Central finance assignment helper Bank uses a sterilized intervention, buying bonds and releasing money (LM1 shifts to LM2). The purpose is to devaluate the local currency so that the relative competitiveness of the export goods could increase. The initial increase of the money supply, followed by the increase generated by the Central Bank allows the producers to invest and to increase their production. After the shift of the LM curve from LM1 to LM2, (IS shifts to IS1 and a new equilibrium point E2 is formed at the intersection of IS1, LM2 and BoP. This new point of equilibrium would be ideal but, unfortunately the other countries react and devaluate their currencies. The devaluation of their currencies determines the return of the real rate of exchange to the initial value. The exports drop down (production is reduced, IS shifts back to IS from IS1). In this point the Central Bank has two options:

To pursue the gain of competitiveness finance homework help through the devaluation of the internal currency.

To use a unsterilized intervention finance project help to reduce the available monetary mass.

The high mobility of capital means that the internal and external capital is sensitive to the internal and external interest rates. So, is the Central Bank help with finance assignment does not react quickly to the shift of the interest rate the country could encounter a serious outflow of capital which will make the sterilized intervention even more expensive. Clearly, on a market with finance assignment solution high mobility of capital the Central Bank should closely follow all the tendencies and to react to them in the shortest time possible.

Figure 1.7 – Market with fixed exchange rates – for low mobility of capital

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As in the previous situations we have a given market on finance homework solution which the equilibrium point E is formed at the intersection of the three curves: IS, LM and BoP. The corresponding values for the intersection point E are the interest rate iW and the national income value of YE.

The situation for a market with low mobility of capital is mostly the same as for one in which the capital has high mobility. Because of the increase of exports (or decrease of imports) the quantity of the internal currency tends to increase (On a free market we would record a shift of the LM curve to the right from LM to LM1) but because the new equilibrium point E1 is in deficit to the balance of payments the Central Bank intervenes and increases the quantity of money available on the market (LM shifts to the right from LM1 to LM2). The modification in the exchange rate makes the internal goods more competitive on the external market. The new monetary supply allows an increase of finance problems answers production and of exports (IS curve shifts to IS1, BoP shifts to BoP1). Because the other countries react (devaluating their own currencies) the real exchange rate decreases, the exports shrink, and the general tendency on the market is to return in the initial point of equilibrium E. If the Central lets the excess of money on the market they will lose their value till the point finance questions answers where their real value will be equal to the initial Y.

The main difference appears because of the financial management assignment help low mobility of capital. So, a low mobility of capital means that the capital is less sensitive to the external changes of interest rates. If the interest rates from other countries are more attractive than the ones from our country the outflow of capital will be much slower than financial management homework help in a country with perfect or high mobility of capital.

This means that the country will be less sensitive to the external shocks and that the country is relatively closed to the exterior. If the country is relatively closed to the exterior the deficit of the Balance of Payments is smaller than for open economies, meaning that the internal money supply will be affected in a small degree and that the sterilization intervention will finance homework assistance be less expensive than in the case of a country with perfect or high mobility of capital.

  1. c)  Fixed exchange rates without sterilization

The unsterilized intervention is a situation in which a Central Bank, from a given country, intervenes on the market to reduce the quantity of national currency. To do this the Bank sells foreign exchange and buys its own currency. The reduction of the experts for finance assignment  national currency determines, on the medium term the return of the equilibrium point on the BoP curve.

In a market of fixed exchange experts for finance homework rates without sterilization, the domestic Central Bank establish an exchange rate at which it is prepared to buy or sell any amount of domestic currency to maintain this imposed value fixed.

Overall if the forces on the market would be free from the Central Bank intervention, the situation will be identical with the case when the currency was allowed to fluctuate. However, on this case, the Central Bank intervenes actively on the market.

Under the fixed exchange rate system, the monetary authority operates in the foreign exchange market to maintain the specific exchange rate established. This means that it will intervene on the market as soon as possible since the modification in LM.

Under a market with fixed exchange rates without sterilization and an expansion of the monetary mass will lead to:

In first instance:

A devaluation of the nominal exchange rate and also a depreciation of the real exchange rate (because in this case the government does finance assignment help not interfere on the market) since the price level is fixed (the level of the goods and services’ price is considered in this case fixed, on the economy, because we are analysing a situation on a short run, when the market does not have the time to shift the prices).

However, the central bank trades domestic for foreign currency to maintain the exchange rate fixed. Because the nominal exchange rate tends to devaluate due to the influx of currency in the national economy, the Central Bank will finance assignment help need to purchase domestic currency and sell foreign currency, which will drop the money supply.

The increase of exports encountered in the case with flexible exchange rate will not have time to materialized, because the time of the intervention finance homework help is very short, and the exporters have not the sufficient time to sell their products.

The level of domestic output (GDP or Y in our graphs) in real terms will tend to increase.

On long run, because the intervention of the Central Bank:

The nominal exchange rate will come back to the initial point and will be established on the initial level. The nominal exchange rates are fixed in this system.

The real exchange rate can move even if the nominal rate is fixed, because in the long run, prices are flexible.

The domestic output (GDP) will remain unchanged (because the time period for the market is too short to react).

In all the three cases (for perfect, high and low capital mobility), the effects which are different in magnitude (and can be observed from the first finance assignments help three graphic representations– Figure 1.8, Figure 1.9 and Figure 1.10) are:

LM shifts to the right due to the exogenous increase in payments as an expansionary monetary policy.

The national currency tend to devaluate and the IS curve tend to shift to the right.

The BoP curve tends to move to the right, excluding finance term paper homework help the case of the perfect capital when BoP is a horizontal curve parallel with the abscissa axis. The mobility of capital is determining the slope of this curve: the higher the mobility, the flatter the BoP curve and inverse.

The government intervention will shift the LM curve to its original position: neither IS nor BoP will change, or, if they will, this will be on a very short period of time because the Central Bank intervention is very fast.

Table 1.4 – Effects of an endogenous growth of the money supply (an exogenous increase in payments) on the exchange rate (nominal and real) and GDP in the case of a market with fixed exchange rates without sterilization

Capital mobility GDP (Y) enominal ereal
Low mobility Remains the same Remains the same Will change
High mobility Remains the same Remains the same Will change
Perfect mobility Remains the same Remains the same Will change

Figure 1.8 – Market with fixed exchange rates (Central Bank uses unsterilized intervention) – for perfect mobility of capital

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On an open market we have the initial finance thesis help situation of equilibrium (point E) formed at the intersection of the three curves: IS, LM and BoP.  The intersection point E has as coordinates the YE level of income and the interest rate iW.

We have the same assumption; an increase of the exports finance thesis help services determines an inflow of foreign currency which sold to the local banks will release on the market a higher quantity of money. If on a market with fixed exchange rates the quantity of money increases (because of an surplus of the Balance of Payments) the natural tendencies finance assignments help online for the market forces will be the following, The increase of the money supply will determine a decrease of the interest rate at a level inferior to iW which will attract an increase of production of production (and a shift on the IS curve from E to E’). The low interest rate will cause an outflow of finance assignment writing help capital and a shift of the equilibrium to E’’.

To avoid the instability associated to this shifts the Central Bank intervenes with an unsterilized policy, selling foreign exchange and, thus, reducing the supply of national money. The action of the Bank will stop the possible effects so that the finance dissertation help equilibrium point remains in E, at a level of the interest rate equal to iW and at the initial value of Y.

We should note that both interventions (sterilization and unsterilization) restore the BoP equilibrium under fixed exchange rates. On the long term the remedial action to resolve the original reason for the CA deficit, eventually the Central Bank will run out of foreign reserves and will be forced to adjust its exchange rates.

Figure 1.9 – Market with fixed exchange rates – for high mobility of capital

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We have a market on which the equilibrium point is formed at the intersection of IS, LM and BoP. The equilibrium point is E and its corresponding values are the iW level of the interest rate and the YE level of the national income. The mobility of capital is high, meaning that research finance assignment although it is an imperfect mobility it is closer to the term papers assignment homework help perfect mobility of capital than to no capital mobility.

If in a given period the exports of our economy, relative to the level of imports increase the internal monetary mass will decrease and there will be a clear tendency for the LM curve to shift to the right from LM to LM1. The following fact happens: the exporters bring help with finance homework inside the country a larger quantity of foreign currency than usual and they sell it to the local banks for internal currency, thus increasing the monetary supply.

As we have stated before the tendency finance project help on the market is for LM to shift from LM to LM1 and for the interest rate to decrease from iW to iL (a value which would better reflect the new quantity of money YE’). But, because of the unsterilized finance assignment solution intervention of the Central Bank we do not get to this new situation because the Central Bank acts to retract the surplus on the market and to restore the initial equilibrium point E.   The Central Bank will sell foreign assets on the market to retract the excess of monetary supply till it shrinks to the initial level LM.

Because the mobility of capital on the market is high the finance homework solution Central Bank has to react quite quickly because a shift of the interest rate can generate outflows of capital. The quick reaction will have as an effect the selling of the Online finance tutor assets at unattractive prices.

Figure 1.10 – Market with fixed exchange rates – for low mobility of capital

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We have a country which has a low mobility of financial management assignment help capital and an equilibrium point E formed at the intersection of IS, LM and BoP, with a level of the interest rate iW and a national income YE. In a given period finance assignment assistance this country records an increase of exports and a relative decrease of exports. The gain obtained by the exporters will generate an inflow of external currency inside the country.

The exporters will sell this income finance homework assistance to the local banks which will release local currency generating a new tendency on the market: the shift of the LM curve from LM to LM1. The unsterilized intervention of the Central Bank (which sells foreign assets to retract the national currency from the market) stops this tendency, and restores the initial equilibrium point E.

Because this situation happens on a market with financial management homework help low mobility of capital the eventual shift of the internal interest rate would not generate quick outflows of capital, meaning that the Central Bank has more time to react to the tendency on the market. More time means that the Central Bank has time to sell its foreign assets at better prices and that it can follow such a policy for a longer period.