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Chapter 19: Q.16 (page 528)

How can exchange-rate targets lead to a speculative attack on a currency?

Short Answer

Expert verified

If investors believe that financial organization isn't holding the foreign reserves, they'll target this nation for speculative attack and for this, they sell their local currency to the financial organization. Once the financial organisation is out of foreign reserve it'll not be ready to purchase local currency at fixed rate and therefore the currency's rate will start floating that may cause depreciation in currency yet. Thus, during this way rate targets cause a speculative attack on a currency. Thus, charge per unit targets cause a speculative attack on a currency.

Step by step solution

01

Concept Introduction

Rate target refers to the monetary policy or strategy that features targeting the worth or fixing the worth of the domestic currency to the foreign currency similar to the gold standard. The changes within the value of the foreign currency will influence similar change within the targeted or domestic currency. A speculative attack refers to the sudden and enormous amount of selling of a domestic currency or acquisition of the domestic currency by the foreign investors.

02

Explanation of Solution

Speculative attacks generally happen with the target countries that have pegged their currencies to a different country's currency. The country with charge per unit target uses fixed rate system and needs to intervene within the interchange market to take care of the speed. it's to carry as many foreign reserves to satisfy the sudden demand for the domestic currency.

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Most popular questions from this chapter

If the Federal Reserve buys dollars in the foreign exchange market but conducts an offsetting open market operation to sterilize the intervention, what will be the impact on international reserves, the money supply, and the exchange rate?

“The abandonment of fixed exchange rates after 1973 has meant that countries have pursued more independent monetary policies.” Is this statement true, false, or uncertain? Explain your answer.

Go to the St. Louis Federal Reserve FRED database, and find data on net exports (NETEXP), transfers (A123RC1Q027SBEA), and the current account balance (NETFLIX).

a. Calculate net investment income for the most recent quarter available, and for the same quarter a year earlier.

b. Calculate the percentage change in the current account balance from the same quarter one year earlier. Which one of the three items making up the current account balance had the largest effect in percentage terms on the change of the current account? Which one had the smallest effect?

For each of the following, identify in which part of the balance-of-payments account the transaction is recorded (current account, capital account, or net change in international reserves) and whether it is a receipt or a payment.

a. A British subject’s purchase of a share of Johnson & Johnson stock

b. An American citizen’s purchase of an airline ticket from Air France

c. The Swiss government’s purchase of U.S. Treasury bills

d. A Japanese citizen’s purchase of California oranges

e. $50 million of foreign aid to Honduras

f. A loan from an American bank to Mexico

g. An American bank’s borrowing of euro dollars

What is the exchange rate between dollars and Swiss francs if one dollar is convertible into 1/40 ounce of gold and one Swiss franc is convertible into 1/25 ounce of gold?
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