The focus this week is on exchange rates Your assignment thi

The focus this week is on exchange rates. Your assignment this week is create a series of line graphs that track changes in exchange rates over the last five years. Using exchange rate information from the Federal Reserve, create a line chart that tracks changes in the US dollar exchange rate with the Chinese Yuan, the Euro, and the Mexican peso from January 2008 through the current year. Include a data point for each available month over these years. If there are multiple data points available in a month, use the data closest to the beginning of the month. After creating the line graph, copy and paste it into a Word document. Compose an essay that discusses the patterns demonstrated in your graph and the trade implications of these patterns.

Your essay should be a minimum of 500 words and be written in APA format with appropriate citations and a reference page. The reference page should not be included in your word count. Be sure to include specific connections to the material from your text and other resources when appropriate in your essay.

Solution

1. Monetary policy refers to the use of interest rates to try and influence the economy. An expansionery monetary policy will mean that interest rates decline. This will mean that the demand for domestic funds will fall and this will cause the currency to depreciate. Similarly an increase in interest rates will cause an increase in demand for funds and this will cause an appreciation of the currency. Monetary policy thus is an indicator which way the exchange rates will move in the future.

2. A money supply increase means an expansionery monetary policy. As the LM curve shifts rightwards this will cause an outflow of capital from the economy. This will mean that the Central Bank will have to buy and sell funds until the exchange rate adjusts itself. Eventually due to the impossible Trinity the interest rates will equalize with the world interest rates. This will be in case of fixed exchange rates. Under flexible exchange rates the money supply component is at the control of the Central Bank and so the balance of payment s is fixed at 0. An expansionery monetary policy in such a case will mean capital flows adjust themselves to ensure that the balance of payments is 0.