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Transcript of Question 1
Assessment of Government influence on Exchange Rates
Did the intervention effort by the Thai government constitute direct or indirect intervention?
Reserves in dollars for bahts
Demand for bahts=increased
upward pressure on baht
Did the intervention by the Thai government constitute sterilized or non-sterilized intervention? What is the difference between the two types of interventions? Which type do you think would be more effective in increasing the value of the baht?
Constituted Non sterilized
Central bank intervenes the foreign exchange market
Sterilized: retainment of money supply
Increased value of baht: non sterilized
If the baht is virtually fixed with respect to the dollar, how could this affect U.S. levels of inflation? Do you think these effects on the U.S. economy will be more pronounced for companies such as Blades that operate under trade arrangements involving commitments or for firms that do not? How are companies such as Blades affected by a fixed exchange rate?
Inflation rates = transferable
What are some of the potential disadvantages for Thai levels of inflation associated with the floating exchange rate system that is now used in Thailand? Do you think Blades contributes to these disadvantages to a great extent? How are companies such as Blades affected by a freely floating exchange rate?
Blades=denominated in baht
What do you think will happen to the Thai baht's value whe teh swap arrangement is completed? How will this affect Blades?
Government= swap bhat reserves
central banks=more bhats
Blades Inc= negatively affected
used direct intervention
exchange rates are transferable
disadvantages of floating exchange rates