International Business In what ways can a government influen

International Business

In what ways can a government influence the exchange rate of a currency in a “floating system”?

Solution

The government can influence exchange rate in following ways:
1, By printing more currency money supply can be increased. This weakens the dollar and decrease exchange rate. Printing money increase money supply which lowers he exchange rate. Lower the money supply stronger is the Dollar.
2. Fiscal policy: By opting for expansionary fiscal policy the government can increase money supply by reducing taxes, etc. At the same time they can plan to reduce money supply and increase the power of solar.
3. Forex reserves: In some countries the central bank has forex reserves in dollars which they can buy or sell to influence the exchange rate. The supply of dollars in market make dollar weaker with respect to foreign currency and purchase of dollars by foreign central banks increases dollar exchange rate.
4. Interests rate: By decreasing or increasing the policy rate by the Federal Reserve the interest rate in the banking system can be increased or decreased. Higher the interest rate weaker the dollar and lower the interest rate stronger the dollar.

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