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Chapter 11: Problem 8

Distinguish between stabilizing speculation and destabilizing speculation.

Short Answer

Expert verified
Stabilizing speculation works to reduce market fluctuations by buying low and selling high, maintaining equilibrium in the market. Conversely, destabilizing speculation contributes to market volatility by purchasing assets when prices are high in hopes of selling them when they increase even more, leading to dramatic fluctuation and instability in the market.

Step by step solution

01

Understanding Stabilizing Speculation

Stabilizing speculation refers to investment strategies pursued by individuals or entities, with the goal of reducing extreme market movements. Speculators in this case make purchases when prices are low in hopes of selling when prices are high.
02

Understanding Destabilizing Speculation

Destabilizing speculation, on the other hand, is the purchase of assets when prices are high with the hope of selling them when they are even higher. This type of speculation can lead to dramatic fluctuations in the market, as it tends to drive prices up and then cause them to crash.
03

Differentiating Between Stabilizing and Destabilizing Speculation

The main difference between stabilizing and destabilizing speculation lies in their respective effects on the market. While stabilizing speculation seeks to reduce market fluctuations and help maintain equilibrium in the market, destabilizing speculation tends to contribute to market volatility and significant price changes.

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Most popular questions from this chapter

What is the strategy of speculating in the forward market? In what other ways can one speculate on exchange rate changes?

The supply and demand for foreign exchange are considered to be derived schedules. Explain.

What is meant by the foreign exchange market? Where is it located?

What explains the relationship between the spot rate and the forward rate?

Who are the participants in the forward exchange market? What advantages does this market afford these participants?
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