Finance Homework Help

To explain the fixable exchange rate, fixed rate with sterilization and fixed rate without sterilization, we have used simple monetary model as provided in our finance homework help illustration. The three basic assumptions of this model are analyzed separately which gives a comprehensive report of the changes that are occurring with respect to the change of monetary mass. Analysis of exchange rate as show in our finance assignment homework help  is carried out with the help of the graph.To summarise, on a short run period in which the price level is restored in nominal and real terms, the exchange rate remains constant.

Q.At this question we want to analyze the effects of an increase of an exogenous payment in a given country which we assume has a simple monetary system. There are three basic assumptions for a simple monetary system:

  1. A stable function of the monetary demand.
  2. A vertical aggregate supply schedule
  3. Purchasing power parity (PPP)

The main advantage of this model is that its three basic assumptions are analyzed separately, fact that allows a better comprehension of the changes occurring in the economy at a change of the monetary mass.

The monetary approach argues that devaluation can only have an effect on the balance of payments by influencing the demand for money in relation to the supply of money.

In the following part we will analyze the evolutions finance homework help 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 exchange rates with unsterilized intervention from the Central Bank. For each scenario we will analyze and explain the effects related to the exchange rate (both in nominal and real terms) and on the national income (GDP).

  1. Flexible exchange rates

In a simple monetary system an exogenous increase of the payments (caused by various causes like, the increase of incomes from exports, an inflow of capital caused by the fall of the outside interest rate) has more effects. Firstly, we should note that in a flexible exchange system the Central Bank does not intervene on the market. The representation can be seen in the Figure 3.1. (it is comprised by three graphs: a, b and c).

The exogenous factors generate the increase of the internal money stock from M1 to M2 (see figure c). You can observe on the same graph that the Centrals Bank level of reserves is not affected (because the Bank does not use the reserves to intervene on the market).

In Graph b we can see that the increase of the monetary help with finance homework mass determines a real growth of the aggregate demand, the demand shifts to the right from AD1 to AD2. The change of the aggregate demand level does not attract a growth of the aggregate supply because the producers do not have how to change their production capabilities on the short time (the AS curve remains the same). We can see that the increase of income from Y1 to Y2 is not covered by the supply. This fact means that at the general level of prices P1 the economy of the country can offer products with a total value of Y1.  We can observe that at the Y2 level of income the demand curve does not meet the supply curve, meaning that the market is not in equilibrium.

In a first phase the surplus of money keeps its value and the inhabitants of the country satisfy their demand with import goods. The increase of exports leads to a depreciation of the exchange rate (you can see on Graph a below that the exchange rate shifts from s1 to s2). The depreciation of the exchange rate generate an increase of the domestic prices (Graph a), which, one the one hand, determines an increase of the demand for money (Md1 shifts to Md2) and, on the other hand causes a contraction of the aggregate demand (on the AD2 curve, from the right to the left) till the point of intersection with the aggregate supply (AS1).

The point of equilibrium has as corresponding values a higher general level of prices (P2) and a real level of GDP Y1, equal the initial level.

We can state that in time any increase of the money finance homeworks help supply (which is not followed by an increase of production) will have as effects the depreciation of the exchange rate and the increase of the general level of prices.

To summarize, we observe that:

The exchange rate depreciates from s1 to s2 (both in nominal and real terms, since we are on a short run period in which the price level its assumed to be fixed; on short run, both real and nominal exchange rates are considered to move in the same finance homework assistance  direction if the price level is fixed, in our case to depreciate).

  • On the long run the real national income (GDP) returns to the initial value.

On the short run the GDP rises but unsustained finance homework solution by the internal production it returns to its real value.

  • The new nominal GDP will be higher than the precedent one.

Figure 3.1 – Monetary expansion in a regime of flexible exchange rates

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Figure 3.1.a                                                              Figure 3.1.b

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Figure 3.1.c

  1. Fixed exchange rates with sterilization

Figure 3.2 – Monetary expansion in a regime of fixed exchange rates with sterilization

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Figure 3.2.a                                                                 Figure 3.2.b

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Figure 3.2.c

Four out analysis we assume that we have a market with fixed exchange rates on which the monetary mass has grown, due to some exogenous factors (the decrease of the external interest rates, the growth of exports, etc.).

The effects recorded on the market are registered finance homework help online on the above graphics (3.2.a, 3.2.b, 3.2.c). We can see on 3.2.c that an increase of the money supply from our country will shift the curve to the left, from Ms1 to Ms2.  At the level Ms2 (with corresponding reserves R1) the money supply is larger than the Money demand.

Because the inhabitants of the country have access to higher incomes the aggregate demand increases from AD1 to AD2 (in figure 3.2.b the curve of the aggregate finance homework writing help demand shifts to the right). We can also see in the same figure (3.2.b) that the aggregate supply does not react to the change in the monetary mass because the time is too short, that is why the general level of prices grows from P1 to P2.

Now we can see in figure 3.2.a that the increase of the level of prices to P2 (in the condition of fixed exchange rates) puts the country in a deficit zone (at the left of the PPP curve).In this point, to reduce the deficit the Central Bank can use sterilization or unsterilization interventions. In this situation we will analyze the effects of a sterilization policy.

If the Central Bank would choose to buy foreign currency it would finance homework help service release on the market some extra local currency which will increase the deficit of the balance of payments. That is why the Central Bank will choose to create domestic bonds and sell them to reduce the monetary mass. The Central Bank has as an option the possibility to use a part of the local currency, obtained this way, abroad to buy foreign currency to increase its reserves.

Anyhow, after the intervention of the Central Bank finance homework help the general level of prices restores from P2 to P1. The reduction of prices will determine the reshape of the aggregate demand (its curve will return from AD2 to AD1).

The equilibrium on the market will be between the same Aggregate Supply curve and the initial AS1 curve. We can note that the shifts in the aggregate online finance homework help demand don’t affect the value of the real GDP which remains constant (only the nominal GDP changes on the short run when the general level of prices reaches P2).

On the monetary market, the monetary supply reduces (on the curve Ms2) reaching again an equilibrium point with the monetary demand. In this point the equilibrium has R2 as a corresponding value of the reserves (smaller than R1). If, as mentioned before the finance homework help Central Bank uses the sterilization policy not only to reduce the deficit but also to restore its reserves, the monetary supply could shift again to the right to form equilibrium in a point with R1 reserves, or a higher value.

To summarize, we observe that:

Before the intervention of the Central Bank:

The exchange rate remains constant at value s1 (both in nominal and real terms, since we are on a short run period finance homework help service in which the Central Bank controls the exchange rate);

  • The real national income (GDP) remains constant at value Y1;
  • The nominal national income

After the intervention of the Central Bank:

  • The exchange rate remains finance homework help constant at value s1 (both in nominal and real terms, since we are on a short run period in which the price level is restored);
  • The real national income (GDP) remains constant at value Y1.
  1. Fixed exchange rates without sterilization

Figure 3.3 – Monetary expansion in a regime of fixed exchange rates without sterilization

04Figure 3.3.a                                                                Figure 3.3.b

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   Figure 3.3.c

On a simple monetary system an increase of the help with finance homework exogenous payments made inside the country (the causes can be varied: a decrease of the interest rate outside the country, an increase of exports, etc.) will have the following effects:

In the first phase, the market reacts at the growth of the monetary mass (To observe the effects of the increase of the monetary supply from the market finance homework assistance follow the graphs above from c to a.)

You can see in graph c that the increase of the monetary supply shifts its curve from Ms1 to Ms2. We can see that the offer of money is, in these conditions, above finance homework help the monetary demand (Md1).

The increase of the nominal national income has as an effect an increase of the individual income which pushes up the aggregate demand. You can see in graph b that the aggregate demand shifts from AD1 to AD2. The sudden rise of the aggregate demand does not let the producers to react, so that the curve remains the same.

Now we move to graph a where we observe that the exchange rate remains at the same level and that the prices grow from P1 to P2. At the level of prices P2 because the exchange rate remains the same we are in deficit.

In the second phase the Central Bank intervenes to reduce the finance homework writing help  monetary mass (You should observe the effects of the intervention following the graphs from a to c).

So, the Central Bank, using an unsterilized intervention sells domestic bunds for domestic currency, reducing in this way the money supply. The Central Bank buys currency, reducing the monetary mass until the level of prices decreases from P2 to P1.  The reduction determines the finance homework help  reduction of the aggregate demand to its original size, from AD2 to AD1 (Graph b). In graph c we can see that the monetary supply reduces (it remains on the Ms2 curve to a new point of equilibrium at the intersection between Md1 and Ms2. This new point of equilibrium has as a corresponding value of the reserves R2 (a value smaller than the initial R1). The difference between R1 and R2 represents the cost paid by the Central Bank to assistance with finance homework restore the equilibrium.

To summarize, we observe that:

Before the intervention of the Central Bank:

The exchange rate remains constant at value s1 (both in nominal and real terms, since we are on a short run period in which the finance homework solution Central Bank controls the exchange rate);

  • The real national income (GDP) remains constant at value Y1;
  • The nominal national income

After the intervention of the Central Bank:

  • The exchange rate remains constant at value s1 (both in nominal and real terms, since we are on a short run period in which the price level is restored);
  • The real national income (GDP) remains constant at value Y1.