Help with Finance Assignment

The result derived using Mundell-Fleming model  presented underneath depicts the finance assignment help provided by our tutors.  This model shows the divergence between external and internal stability. We have considered the cases wherein the criteria for the model are fulfilled. Time effects on the market with respect to capital mobility and exchange rates are show below with the help of a graph. Change in time profiles is also explained in finance assignment help report if the J curve effect is seen. To analyze the J curve effect, period should be long enough to permit complete movements on the curve. 

Q.Elaborate the highly possible time profiles of the effects in relation to the year of external inflow and for the following three years.

How would you substantiate your answer in case of the time profiles change if there exists J curve effects?

  1. Flexible exchange rates 

Firstly, we should note that the next three cases are happening on markets on which all the conditions for a Mundell-Fleming model are fulfilled.

Figure 2.1 – Time effects on a market with perfect capital mobility and flexible rates of exchange

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t0: After a great year on the finance assignment help market abroad the exporters gain more on the foreign markets than the importers spend, because of that the internal quantity of foreign currency will grow at an unseen level.

The exporters change their foreign currency at help with finance assignment  the local banks for domestic currency. After that the local banks will change the foreign currency at the central bank. This endogenous factor (the growth of exports) will finance assignments help determine (for our country) a significant growth of the monetary mass.

In this case, as we move towards t1:

  • The nominal exchange rate tends to depreciate.

Also the real exchange rate tends to depreciate, since the price finance assignment assistance level is fixed (we are now into a short run situation, because we are into a period less than 1 year, when the market does not have the full time to shift the prices, but it start to do this).

  • The level of domestic output (GDP or Y) in real terms tends to go higher (it start moving from from YE to YE1).

 

t1: The growth of the monetary supply in the initial year will cause a significant decrease of the interest rate from iW to iL. The large quantity of money on the market makes the capital more affordable for the local investors but, because we are on a market finance assignment help  with perfect capital movement the owners of capital unsatisfied by the local interest rate will search (on the medium term) to move the money on a market with a higher interest rate. So, in this second year of the analysis we have two contrary forces acting on the market: internal investors’ satisfied with the low interest rate and owners of capital which want better interest rate. The first category will invest internally; the second one will generate an outflow of capital, and both of them will contribute in t2 to an increase of the interest rate.

In this phase we can see on the graph the increase help with finance assignment of the monetary mass is reflected by the growth of the GDP (Y) from YE to YE1 and by the shift of the LM curve from LM to LM1. We can also see a temporary equilibrium formed in E1 and we can see that the production curve and the BoP curve do not react as quickly as the LM curve.

In this case, when we reach t1, the flexible exchange rates cumulated with the expansion of the monetary mass will lead to:

  • A depreciation of the nominal exchange rate.
  • Also, at the beginning, a depreciation of the real exchange rate since the price level is fixed. The depreciation of the nominal exchange rate (begun in t0 period) will lead at the end of this period to a rise in the aggregate price index (an index made up of a mixed basket of national and imported goods). The price of imports becomes higher. Because the real exchange rate is determined by the nominal exchange rate multiplied by the index prices (foreign prices divided to domestic prices), this means that the value of the real exchange rate will be higher than the nominal one. This will led to an appreciation of the real exchange rate.
  • A higher level of domestic output (GDP or Y) in real terms compared with the previous year (from YE to YE1). In this case, The GDP reaches its highest value (in YE1).

 

t2: In the second year after the exogenous growth of payment we can observe the following effects on the market.

Firstly, because of the high demand for money from the investors and because of the outflow of capital the total money supply reduces from YE1 to YE2. The smaller assistance with finance assignment  money supply determines an increase of the cost of money, in other words of the interest rate, from iL to iK.

Secondly, the investors used the cheap money to raise their production capabilities so, from this year we can see the effects of this actions. On our graph the growth of the level of production is surprised by the movement of the IS curve to the right.

On the graph we can see that the production curve IS shifts to the right from IS to IS1, the LM curve shifts to the left from LM1 to LM2 and the BOP curve shifts to the right from BOP to BOP’. A new point of equilibrium forms in E3.

In other situations we would say that the market has finance assignment solution  reached an stable equilibrium but, here, the capital mobility is perfect. This means that because of the interest rate level iK inferior to the interest rate from outside the country, the outflow of capital continues.

In this case, when we reach t2:

  • The nominal exchange rate

At the end of the t1 period, the economic agents reacted and this led to an appreciation of the real exchange rate. However, as far as we go finance assignment help online throughout this period, because the nominal exchange rate now appreciates, the real exchange rate tends to depreciate (because the market tends to react and the aggregate price index tends to fall).

  • The domestic output (GDP or Y) decreases.

 

t3: In the third year after the moment of the exogenous growth finance assignment help of payments the movements continue on our market.

The outflow of capital stops when the interest rate reaches to iQ which has a value equal to the initial value of iW and to the interest rate value from finance assignment assistance outside the country. The reduction of the monetary mass is reflected by the shift to the left of the LM curve from LM2 to LM3.

On our graph we can see that the growth of the interest rate is followed by a reduction of Y from YE2 to YE3. We can see that YE3 is higher than the initial Y, this fact can be easily explained through the internal growth of production.

The level of production is partially finance assignment help affected by the outflow of capital, but the production remains on the same IS2 curve (which reflects the new capabilities of production).

The growth of production in t2 also determines a growth of the average income in the country which also determines an increase of the imports. The growth of the level of finance assignment solution  imports has as an effect the shift to the left of the BoP curve (from BoP’ to the initial BoP).

We can see on our graph that a new point of equilibrium forms in E3. This equilibrium is formed at the intersection of the three main curves IS2, LM3 and BOP. The equilibrium is a stable one because the level of the interest rate corresponds to the world finance assignment help online average fact that stops a massive outflow or inflow of capital.

In this case, when we reach t3:

  • The nominal exchange rate continues to appreciate.
  • The real exchange rate continues to depreciate.
  • The domestic output (GDP or Y) continues to decrease. 

Table 2.1 – 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 and perfect mobility of a capital

Year Y (GDP) enominal ereal
t0 Grows Depreciates Depreciates (the price level is fixed)
t1 Reaches a maximum Depreciates Depreciate at the beginning and start to appreciate at the end of this period.
t2 Decreases (stabilizes) Appreciates Appreciates at the beginning and start to depreciate at the end of this period.
t3 Decreases (stabilizes) Appreciates Depreciates

b.Fixed exchange rates with sterilization 

Figure 2.2 – Time effects on a market with low capital finance assignment help mobility and fixed exchange rates with sterilization

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t0: As in the previous cases we start our analysis from an initial moment year to when due to a growth of exports a larger quantity of foreign help with finance assignment currency enters the local market. The foreign currency is sold to the local banks for local currency which generates a growth of the monetary supply Ms.

In this case, as we move towards t1:

  • The nominal exchange rate is the one established by the Central Bank.
  • The real exchange rate is the one established by the Central Bank.

The level of domestic output (GDP) in real terms finance assignment writing help is at the initial equilibrium point YE1, at which is the exchange rate fixed.

t1: In the second year the growth of the monetary mass (the national income grows from YE to YE1) determines a decrease of the interest rate and the apparition of a new temporary equilibrium point E1. In this point E1 the balance of payments is in deficit. To solve the problem of the deficit the Central Bank intervenes to increase the exports. The way to do this is a finance assignment help service sterilized intervention. The Central Bank wants to make the exportable products more competitive on the external market. For that it chooses to depreciate the local currency so that the real exchange rate to be favorable to the local exporters. The Bank depreciates the local currency by releasing even more money on the market (it will buy domestic bonds to release the money).

  • The nominal exchange rate tends to devaluate (but still remains the same).
  • The real exchange rate tends to depreciate (as the prices are fixed on short run and the real exchange rate evaluate together finance assignment help with the nominal one), since the monetary base increases.
  • The level of domestic output (GDP) in real terms tends to increases to level YE1.
  • The Central Bank does not intervene in this moment because the nominal rate is the same (even if it has a tent to devaluate).

t2: The effects of the Banks actions will be felt on the market immediately but the most important effects will be felt on medium term. We can see that in finance assignment assistance  year t2 due to the intervention of the Central Bank the nominal value of the national income has increased from YE1 to YE2, the deficit of the balance of payment has disappeared (due to the increase in exports and reduction of imports, which now are made more expensive by the shift in the real rate of exchange), and the interest rate has grown from iW to iK.

The new equilibrium point is at the intersection of IS1, LM2 and BoP in the point E2.

This equilibrium could be kept if the Central Bank could avoid the exogenous influences. But we are on a market with high mobility of capital, meaning that the high interest rate could attract an inflow of capital (We should note here that the interest is not as large as on a free market. The capital owners are prudent because they could lose capital due to the depreciation policy used by the Central Bank). Another exogenous influence is related to the Central Banks from online finance assignment help other countries which will depreciate their own currencies to stop the loss caused by this artificial increase of competitiveness.

In this period, because the Central Bank has hot intervened in the previous period, the monetary mass continues to increase. This will lead to:

  • A devaluation of the nominal exchange rate and
  • A depreciation of the real exchange rate.
  • The level of domestic output (GDP) increases to level YE2.

t3: The depreciation of the foreign currencies determines a restoration of the real exchange rate. The value of exports decreases (the IS curve shifts from IS1 to IS), which determines a reduction of the balance of payments, and the central Bank is forced to sell domestic bonds to reduce the monetary mass (from YE2 to YE), fact that determines the shift of the LM curve from LM2 to LM. The new point of equilibrium (E3) is formed at the intersection of the IS, LM and BoP curve and it overlaps on E.

The intervention of the Central Bank has finance assignment help influenced the equilibrium on the market favoring the exporters with the cost of some reserves and by affecting the real income of the final consumers.

The central bank offsets the money supply to stabilize its exchange rate. On long run, because the intervention of the Central Bank the effects are:

  • A valuation of the nominal exchange rate which will led its value to the original level fixed by the government.
  • The real exchange rate, is still depreciated because the market do not had enough time to react.

The GDP comes to its original level from the finance assignment writing help  equilibrium point associated to the fixed exchange rate.

Table 2.2 – 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 fixed exchange rates with

sterilization and high mobility of a capital (on long run)

Year Y (GDP) enominal ereal
t0 Remains the same Remains the same Remains the same
t1 Grows Remains the same Remains the same
t2 Grows Devaluate Depreciates
t3 Stabilizes – Decreases to the initial level Valuation – Return to the initial level Remains the same
  1. Fixed exchange rates without sterilization

Figure 2.3 – Time effects on a market with high capital mobility and fixed exchange rates without sterilization

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t0: An international favourable conjecture determines finance assignment help  the growth of our countrys exports and possibly the reduction of the imports. These changes determine the growth of the foreign currency gained by our exporters. The foreign currency is brought inside the country and changed for local currency fact that determines the growth of the total money supply MS. The growth of the money supply will determine the shift of the LM curve to the right from LM to LM1. The equilibrium point, formed initially at the intersection of IS, LM, BoP will move to E1. The income (Y, or GDP) grows from YE to YE1 and the interest rate drops from iW to iL. In the E1 the equilibrium is not stable and there is a deficit of the balance of payments.

  • In the first instance:

a depreciation of the nominal exchange rate and also a depreciation of the real exchange rate (because in this case the government does not interfere on the market) since the price level is fixed (the level of the goods and services’ price is considered finance assignment solution  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 depreciate due to the influx of currency in the national economy, the Central Bank will need to finance assignment help purchase domestic currency and sell foreign currency, which will drop the money supply.
  • The level of domestic output (GDP) will tend to increase.
  • On long run, because of 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 remains the same, since the price level is fixed (we are now into a short run situation, because we are into a period less than 1 year, when the market does not have the full time to shift the prices, but it start to do this).
  • The domestic output (GDP) will remain unchanged (because the time period before the Central Bank intervention is too short for the market to react).

t1: The changes on the market attract the reaction of the Central Bank.  The Central Bank wants to avoid the depreciation of the local currency, to resolve the finance assignment help  problem of the BoP deficit, to stop an increase of exports and to stop an outflow of capital (this outflow is not a quick one because the market has a low mobility of capital. To realize all these objectives the Central Bank uses an unsterilized intervention. It buys local currency and it sells bonds to reduce the monetary mass.

The danger of depreciation appears because the local producers can not adjust quickly their production levels to the new monetary mass, and consumers help with finance assignment  could choose import products to spend their new income, that is why the Central Bank prefers to reduce the monetary supply.

  • In the first instance:
  • A depreciation of the nominal exchange rate and also a depreciation of the real exchange rate.
  • However, the central bank trades domestic for foreign currency to maintain the exchange rate fixed.
  • The level of domestic output (GDP or Y in our graphs) in real terms will tend to increase.
  • On the 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 real exchange rate depreciates. In the long run, when finance assignments help prices are flexible, the real exchange rate can move even if the nominal rate is fixed. Even if the nominal rate is maintained fixed by the government, the fluctuation on the market will determine a change in the real exchange rate. The tendency of the nominal rate to depreciate will determine a depreciation of the real exchange rate.

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

t2: In this moment, after the intervention of the Central Bank, the reduction of the monetary mass determines the shift of the LM curve from LM1 to its initial position LM. The GDP returns to the initial value Y, from YE1 and the interest rate to iW from iL. The market is again in a stable equilibrium.

  • In first instance:
  • A depreciation of the nominal exchange rate and also a depreciation of the real exchange rate.
  • The central bank still maintains the exchange rate fixed.
  • 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 real exchange rate depreciation in the previous period will continue.
  • The domestic output (GDP) will remain unchanged.

t3: The market has returned to the initial conditions finance assignment help fact that allows again a increase of gains from the exports. The situation explained in t0-t2 repeats. These cycles will repeat until the Central Bank will remain without reserves or until its strategy will allow the development of the production capabilities.

  • In first instance:
  • A depreciation of the nominal exchange rate and also a depreciation of the real exchange rate.
  • The central bank still maintains the exchange rate fixed.
  • 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 real exchange rate depreciation start in the t1 period and deepen in the t2 period will determine a lead at the end of this period to a rise in the aggregate price index. The real exchange rate Because we are on a long run, the finance assignment help nominal depreciation might boost the price of imports enough to increase the price level.
  • The domestic output (GDP) will remain unchanged.

Table 2.2 – 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 fixed exchange rates

without sterilization and low mobility of a capital (on long run)

Year Y (GDP) enominal ereal
t0 Remains the same Remains the same Remains the same
t1 Remains the same Remains the same Depreciate
t2 Remains the same Remains the same Depreciate
t3 Remains the same Remains the same Appreciate

Figure 2.4 – The J-curve for net exports

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To have J-curve effects the analyzed period should be long enough to allow complete movements on the curve.

  1. The J-curve effects for a market with flexible exchange rates

In this case the rate of growth for the net exports is a natural one. The producers use the surplus of money for investment to improve the production process and to be more competitive on the external markets. This allows the natural growth of economy of the country. The inhabitants from a country always have the possibility to choose the best offer (they have access finance assignment help to the local production and to imports). If the local entrepreneurs don’t use the money for investment the currency would depreciate and it will lead to an improvement of exports. That is why in the figure above this situation has as a corresponding curve the finance assignment assistance one marked C2. The net exports don’t know the fastest growth in this situation but still the evolution is a positive one.

  1. The J-curve effects for a market with fixed exchange rates where the Central Bank uses sterilized intervention

When the Central Bank uses sterilized intervention on the finance assignment help service market there takes place a depreciation of the local currency which on the long term has an effect of increase for the net exports of that country. Because of the depreciation the imports are expensive (because in this case the real exchange rate is unfavourable for imports) and the internal consumers are forced to orientate to domestic products. The process of depreciation makes the positive slope for this case (C1) to be the most accentuated from the three analyzed cases.

  • The J-curve effects for a market with fixed exchange rates where the Central Bank uses unsterilized intervention

If the Central Bank would not intervene on the market with unsterilized intervention the local currency would depreciate and the rate of growth of the net exports would be higher. The Bank intervenes and keeps the money at a stable value (stopping the depreciation, which would generate a decrease of exports or the depreciation of the local currency). Practically, we can say that in this finance assignment help case the Central Bank chooses to keep the equilibrium state, because of that the evolution of the net exports is the slowest one  (we can see the slope of the curve C3). We can say that the Central Bank enters into an equilibrium trap which affects the development potential.

Note! The Mundell-Flemming model is useful to analyze a country situation (throughout the domestic currency valuation or devaluation) on short run. It was not designed to explain how the exchange rates are determined in long run, because the real online finance assignment help exchange rate and the price levels are under the market forces control, and not under the government ones. In short run, described in the Mundell-Fleming model, prices are fixed, so a fixed nominal exchange rate implies a fixed real exchange rate as well.

However, we assume some hypothetical situations finance assignment help which helped us to analyze the difference between the real and the nominal exchange rates.