Question 3 :

How change in exchange rate affect the emerging economy in pakistan?

Answer :
Definition:
Exchange rate means how many units of one nation’s currency can be purchased with one unit of
domestic currency. Exchange rate can be called the conversion factor that determines the rate of
change of currencies.
Introduction:
The value of one currency in relation to another is referred to as the exchange rate in the foreign
exchange market. The import and export trade between nations is directly regulated by changes in
exchange rates. Changes in interest rates, inflation, national politics, and the economies of each nation
all have an impact on the exchange rate. The foreign exchange market determines the exchange rate.
Explanation :
This essay’s main goal is to examine the connection between Pakistan’s exchange rate and economic
expansion. Theoretically, a high exchange rate and economic growth are positively correlated,
suggesting that a devaluation or depreciation would increase economic growth. However, Pakistan
mainly imports high-priced goods like oil, machinery, and high-tech items while exporting raw materials
and agricultural-based commodities. Additionally, because exporting products do not adhere to the
necessary international standards, there is a lower demand for Pakistani goods in other markets. Given
the facts, Pakistan’s trade balance is primarily negative, which inhibits economic growth. The floating
exchange rate system was established in Pakistan. Foreign goods become more expensive due to
currency devaluation, which causes individuals to consume domestic items instead. Similar to how local
items would become more affordable to overseas consumers, export will increase. Since the nominal
exchange rate for Pakistan is rising daily, it is obvious that more Pakistani rupees are needed to purchase
one dollar. As a result, the Pakistani rupee depreciates versus the dollar. In addition, the value of
Pakistani currency fluctuates throughout a range of time periods depending on official and unofficial
increases in the exchange rate. While a lack of economic growth causes the currency to depreciate and
lowers living standards, economic growth results in currency appreciation. Official exchange rate of PKR
declined from PKR 10/$ in 1980 to PKR 90/$ in 2011.

Change in exchange rate and Pakistan’s economy:

Pakistan, being a small open economy, has witnessed misalignment in exchange rate due to both
structural and macroeconomic factors. Exchange rate policies pursued by the country have contributed
in an important way in determining the extent and span of misalignment in the exchange rate. Exchange
rate policies have maintained a depreciated exchange rate most of the time in Pakistan, though the
country has also experienced some episodes of appreciation with respect to equilibrium exchange rate.
In the past, factors such as the US dollar’s weakness against other currencies, current government
spending, and poor terms of trade, among others, have contributed to an undervalued exchange rate in
Pakistan.
Contrarily, the episodes of undervaluation compared to the equilibrium exchange rate that took place in
the 1980s (1982 onward) were brought on by the US dollar’s strengthening against other major
currencies, high domestic inflation compared to trading partners, the abandonment of the fixed
exchange rate system, and trade liberalisation. In order to mitigate the negative effects of inflation on
the real exchange rate during the 1990s, the exchange rate was kept depreciated. In addition, Hyde and
Mahboob (2005) provide evidence that Pakistan experienced lower levels of currency rate misalignment
and less variability in that misalignment under the managed and flexible exchange rate regimes than
under the fixed exchange rate regime. Insufficient foreign exchange reserves and the escalation of
current account deficit are the prominent reasons behind the weakening PKR position against the US
dollar.
How long it takes to get a job, where we can afford to live, and when we can retire are just a few of the
most significant aspects of our economic lives that are directly and indirectly impacted by exchange
rates and their variations. Both immediately and over a lengthy period of time, exchange rates have a
significant impact on the economy.

FACTORS:

1. Exchange Rates and What You Pay for Goods:

In this era of globalisation, foreign-made goods are just as common, if not more so, than
domestically created ones. The cost of imported goods is significantly influenced by exchange
rates. You will typically spend much more for international goods when your own currency is
weaker. As a corollary, a stronger home currency may somewhat lower the cost of imports.
Depending on how the exporting countries’ currencies—those from which these products were
sourced—have performed versus the local currency, the price of imported goods may have
changed. After the financial crisis of 2008–2009 and the subsequent recession, the U.S. dollar
dominated most other major currencies, resulting in American customers paying relatively
cheaper costs for imports like German cars or Japanese electronics.
Example:
Let’s examine how prices and currencies interact when multiple nations are involved. Say, for
illustration, that during the course of a year, the euro fell more than 20% in value relative to the
dollar. Say that the Canadian currency also fell at the same time, but only by 10% as compared
to the US dollar. As a result, during the course of that year, the Canadian currency had actually
increased in value relative to the euro by around 15% (from C$1 = EUR 0.65 to C$1 = 0.75),
causing Canadians to pay somewhat less for European goods like wine and cheese.
2. Exchange Rates and Inflation and Interest Rates :
Due to increased pricing for imported goods, a country that imports a lot of goods may
experience greater inflation rates. This could prompt the central bank to increase interest rates
to combat inflation, maintain the currency, and prevent a dramatic decline in its value. A strong
currency, on the other hand, results in lower inflation and a drag on the economy that is
equivalent to tight monetary policy. In reaction, a country’s central bank may decide to maintain
low interest rates or further lower them in order to prevent the domestic currency from
becoming overly strong. The interest rate you pay on your mortgage or auto loan, as well as the
interest you earn on the money in your savings or money market accounts, are all indirectly
affected by the exchange rate.
3. Exchange Rates and the Job Market :
A depreciating native currency encourages economic growth by increasing exports and raising
the cost of imports (forcing consumers to buy domestic goods). Better employment possibilities
are typically associated with faster economic growth. The opposite might also occur, as a strong
home currency hinders economic expansion and reduces employment opportunities.
 4. Exchange Rates and Investments :
Even if you simply hold local investments, exchange rate movements can significantly affect your
portfolio. For instance, because commodities are valued in dollars, a strong dollar often reduces
demand for commodities worldwide. The earnings and valuations of domestic producers of
commodities may be impacted by this decreased demand, however some of the negative effects
may be lessened by the weaker local currency.
5. Exchange Rates and Real Estate :
A weak or undervalued domestic currency might be likened to an ongoing Black Friday sale
when every good, service, and asset in the nation are marked down. The catch is that the selling
price is only available to purchasers who can pay in the stronger foreign currency. This draws
tourists from abroad, which may be advantageous for the economy. However, it also draws
international investors who outbid domestic investors for affordable assets. Housing costs have
increased in countries with weak currencies due to foreign purchasers. Imagine you are looking
for a home and all of a sudden you are competing with bidders who, let’s say, are receiving a 30
percent immediate discount off the asking price. High housing costs and a lack of available
houses have an impact on rent even if you are not looking to buy. Local housing demand has
also been quite strong in several countries over the past ten years as a result of central banks
holding interest rates at historic low levels in an effort to boost their economies. Additionally,
this resulted in their currencies falling to multiyear lows, sparking concerns about a world
currency war.
6. The Bottom Line :
The primary effect of exchange rate swings is largely hidden beneath the surface, much like an
iceberg. Because currency changes have such a significant impact on the economy over the long
and short terms, their indirect effects overwhelm their direct effects. The prices you pay at the
grocery store, the interest rates on your loans and savings, the returns on your investment
portfolio, your job chances, and maybe even the cost of housing in your neighborhood are all
indirectly affected by exchange rates.
Question 4 :

What are the functions of central bank of any country?

Answer 4 :

Definition:

The definition of a central bank relates to a body that manages a country's monetary system. The
Federal Reserve of the United States, the European Central Bank, the Bank of England, and the Bank of
Japan are a few of the most well-known central banks.

Functions of central banks

 ● Traditional functions:
Refers to the the duties that all central banks worldwide perform. I

1. Bank of issue
Possesses the sole authority to issue notes (currency) in every nation on earth. Every bank had the
privilege of issuing notes throughout the early days of banking. However, this resulted in a variety of
issues, including the overissuance of notes and the disarray of the monetary system. As a result, central
banks were given permission by various national governments to print money. One bank's note issuance
has resulted in uniform note circulation and a stable money supply.

2. Government’s banker, agent, and advisor:

Implies that a central bank serves the government in a variety of ways. By collecting government
deposits and providing loans to the government, the central bank acts as a banker for the government,
just as commercial banks act as bankers for the general public. The central bank oversees the
management of the public debt, handles the interest payments on it, and offers all other debt-related
services. The central bank advises the government on issues pertaining to economic policy, the money
market, the capital market, and government loans. In addition, the central bank develops and
implements fiscal and monetary policies to manage the market's money supply and prevent inflation.

3. Custodian of cash reserves of commercial banks:

Implies that the commercial banks' cash reserves are handled by the central bank. One portion of the
public deposits that commercial banks must hold as a cash reserve with the central bank and the other
portion must be held by the commercial banks themselves. The central bank determines the percentage
of cash reserves! In order to provide loans to commercial banks, the central bank retains a portion of
these reserves. As a result, the central bank is frequently referred to as the banker's bank.

4. Custodian of international currency:

Implies that the central bank keeps a minimum amount of foreign currency on hand. This reserve's
primary goals are to cover urgent foreign exchange needs and address unfavourable balance of
payments deficit requirements.

5. Bank of rediscount
Through commercial banks, rediscount the bills of exchange to meet the cash needs of people and
companies. This is a covert method for the central bank to lend money to commercial banks. A bill of
exchange is acquired by being paid a sum less than its face value when it is discounted. Rediscounting
entails deducting from a bill of exchange that has already been deducted. When owners of bills of
exchange need money, they go to a commercial bank to get the bills discounted. Commercial banks can
ask the central bank to rediscount the bills if they themselves need cash.

6. Lender of last resort:

Identify the central bank's most important duty. Commercial banks are also lent money by the central
bank. The central bank offers loans against treasury bills, government securities, and bills of exchange
rather than rediscounting bills.

7. Bank of central clearance, settlement, and transfer:

Implies that the central bank participates in the resolution of commercial banks' mutual debt. Bank
depositors provide cheques and request draughts drawn on different banks. Banks are unable to
approach one another in this situation for deposit clearance, settlement, or transfer.This procedure is
made simple by the central bank by placing a clearing house under it. The clearing house serves as a
venue for the resolution of reciprocal debt between banks. To settle interbank payments,
representatives of several banks gather in the clearing house. This aids the central bank in
understanding the commercial banks' liquidity situation.

8. Controller of Credit
Implies that the central bank has the authority to control how commercial banks create credit. The
volume of deposits, cash reserves, and interest rate offered by commercial banks all influence the
generation of credit. The central bank has direct or indirect control over each of these. For instance, the
central bank can affect commercial bank deposits by engaging in open market operations and modifying
CRR to regulate different economic conditions.

● Developmental Functions:
Make reference to the activities that support the nation's banking system and economic growth. These
are optional roles for the central bank.

1. Developing specialized financial institutions:

List the central bank's main responsibilities for a nation's economic growth. The central bank creates
organisations to meet the credit needs of rural companies and the agricultural industry. The Industrial
Development Bank of India (IDBI) and the National Bank for Agriculture and Rural Development are two
of these financial organisations (NABARD). These are referred to as specialised institutions because they
cater to particular economic areas.

2. Influencing money market and capital market:

Implies that the role of the central bank in regulating the financial markets Long-term credit is handled
by the capital market, whereas short-term credit is handled by the money market. By regulating these
markets' activity, the central bank keeps the nation's economy growing.

3. Collecting statistical data:

Collects and evaluates information about a nation's banking, currency, and foreign exchange position.
The information is very beneficial to academics, decision-makers, and economists. For instance, the
Reserve Bank of India publishes the Reserve Bank of India Bulletin, whose information is helpful for
developing various policies and making macroeconomic decisions.