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International Finance Essay

625 words - 3 pages

1. Explain why another country would abandon its own currency and use the U.S. dollar as its official currency instead. Explain why such a policy will not work in the long run. 5 points 

Other countries abandon their own currencies in order to protect themselves from possible devaluation and inflation as well as reduce a number of risks they might have when it comes to foreign investments. Thus, by abandoning their own currency and using the U.S. dollar they are able to provide a more stable and secure economic and investment climate for their country. Also, by doing this, it helps that country's economic climate become more credible and it helps to encourage both local and foreign investors to invest money into that country and their capital market again

2. According to the text, freely floating exchange rate policy means that a country allows market forces to determine the value of its currency. I believe that this policy exist only ...view middle of the document...

1. Explain why another country would abandon its own currency and use the U.S. dollar as its official currency instead. Explain why such a policy will not work in the long run. 5 points 
A country would resort to dollarization as the U.S. dollar has greater stability over its domestic currency. Though countries will temporarily benefit from more stable and economic conditions, they give up their right to influence their own monetary policy and ability to manage their national economy.

2. According to the text, freely floating exchange rate policy means that a country allows market forces to determine the value of its currency. I believe that this policy exist only on paper. Why do you think this is the case? 5 points.
Though the freely floating exchange rate policy state that the exchange rate values are determined without any intervention by the governments, I believe that every country still regulates their exchange rate in order to remain competitive in the export industry. China, for example, still regulates the fluctuation of their exchange rate even though they claim that they implement the freely floating exchange rate policy. In my opinion, the policy is simply a model that illustrates an extreme.

3. Why do governments as represented by their Central Banks intervene in the foreign exchange market? 5 points.
Governments represented by their central bank intervene in the foreign exchange market to control the value of its currency, build reserves, stabilize the exchange rate, correct any misalignments of the exchange rate, provide liquidity in their markets, and to decrease exchange rate volatility. Thus, they intervene because changes in the exchange rates that occur can affect the health of their markets and financial systems as well as inflation and economic growth, and they of course don't want that.

4. What is fundamental analysis in macroeconomics, not finance?
Fundamental analysis (in macroeconomics) looks to measure the value of an investment by examining related economic factors. These factors include rate of inflation, interest rates, GDP rate, and unemployment level. Fundamental analysts assess the overall conditions of an economy to understand any and all factors that may affect the value of an investment. 

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