Study Session 5: Economics: Monetary and Fiscal Policy, International Trade, and Currency Exchange Rates
Hey there, there are two concepts that are driving me crazy that I can’t just figure out. Anyone know?
A commonly seen headline in media is “Central bank increases the interest rate….”
(1) Is the rate that is increased the nominal rate or the real rate?
(2) What is the effect does the real interest rate and the nominal interest rate have on inflation?
(3) What happens to GDP if the real interest rate is decreased (if it can be decreased by the central bank) or decreases?
(4) What is the feasibility of achieving low inflation and high GDP growth for a country?
I’m confused as to what kind of interest rate is at play here? This is the interest rate for securities right?
I am studying about monetary and fiscal policies in US and UK. So I try to find the historical change in these policies with expected info from 1900 but I still can’t find out (I see the FED fund rate in Bloomberg terminal but it only has from 1954).
Please kindly guide me where I can find these info or share it with me,
Many many thanks,
Here is the exerpt from reading 20, THE FOREIGN EXCHANGE MARKET:
” During 2010, the nominal yuan exchange rate against the US dollar (CNY/USD) declined by approximately 3 percent—meaning that the US dollar depreciated against the yuan”.
To me, this statement seems to be illogic and wrong; For the ratio CNY/USD to decrease, either the numerator has to decrease or the denominator to increase.
Could someone explain me the rationale for this statement?
Pressure from the dollar on the euro continues - with EURUSD falling to a yearly low of 1.1500 at the end of last week. At the moment, the pair is trading at 1.1392.
According to the chart, it appears as though an inverse head and shoulders is forming on the daily timeframe (D1):
The image shows that currently EURUSD is making its first attempt at a breakthrough of the neckline. I first mentioned this almost two months ago in my online currency market reviews.
I’m a little confused now with the interaction of currency exchange rates and interest rates.
If I put my monetary policy hat on (and quite dashing it is, I might say) I get that if I raise interest rates, money comes flowing into the country / currency and that strengthens the exchange rate because more people want my currency so the “price” of that currency goes up.
I got this question wrong on the Schweser mock exam and I don’t understand why the answer is Capital account but not Current account.
Q: A Canadian firm purchases the rights to extract oil from a field in Mexico. Which balance of payments account will reflect this transaction
A: Capital account
“A developing country that maintains a fixed value for its currency relative to the Canadian dollar is experiencing a decline in its economic activity, and its inflation rate falls below the level of inflation in the Canada. The most likely result of the developing country’s actions to maintain the fixed exchange rate target is that its:
- foreign exchange reserves will decrease.
- short-term interest rates will fall.
- money supply will contract.
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