Chapter 6 HW 3.

Direct Intervention a) Each central bank has an amount of reserves they may use to intervene and put pressure on another currency, but the powers of reserves are little if used in a standalone effort. It’s mainly used to try and stabilize the economy and financial markets. 6. Currency Effects on Economy a) Weak home currency in the home economy can stimulate foreign demand for products, boost U.S. exports, boost U.S. jobs and reduce U.S. imports. b) Strong Home currency can encourage consumers and corporations of that country to buy goods from other countries which make the inflation rate lower. 7. Feedback Effects a) Weak home currency causes inflation since it reduces foreign competition while strong home currency reduces inflation due to foreign competition. 8. Indirect Intervention a) Why would the Fed’s indirect intervention have a stronger impact on some currencies than others? Why would a central bank’s indirect intervention have a stronger impact than its direct intervention? b) It is because different countries have different factors (such as U.S. interest rate vs Canada or U.S. interest rate vs Japan) and will affect each country’s relationships differently. It would have a stronger impact probably due to the ability to alter several factors as opposed to a single direct approach. 13. Effects of Indirect Intervention a) Probably the reason would be that the other currencies might be pegged to the Chilean peso and that other Latin American countries widely depend on Chile such as trade or other factors of the nature. b) Other countries would likely to lower interest rates to weaken the currency and ultimately stimulate the economy. c) It will probably negatively affect them if the Latin American currencies depreciate.