Exchange Rate Adjustments and the Balance of Payments

Module 12 – Exchange Rate Adjustments and the Balance of Payments

Currency Depreciation

Q- Exchange rate fluctuation may affect industries that are in direct competition with foreign producers or rely on their supplies. Specifically, international competitiveness is affected through the influence the exchange rate has on relative costs. In a critical essay, assume that the following four events are taking place:

• Americans increase their travel to Europe.
• Saudi investors purchase large amounts of U.S. stocks
• U.S. interest rates increase suddenly because of a relative increase of world interest rates
• Other countries experience economic and political turmoil and become less stable when compared to the United States.

Then, please answer the following questions:

• How will each event affect the foreign exchange market?
• Will your answer be different if the currency was pegged?
• Please explain if a dirty float system will change your assessment

Directions

• Your essay is required to be six pages in length, which does not include the title page and reference pages, which are never a part of the content minimum requirements.
• Support your submission with course material concepts, principles, and theories from the textbook and at least three scholarly, peer-reviewed journal articles. Use the Saudi Digital Library to find your resources.
• Use Saudi Electronic University academic writing standards and follow APA style guidelines.
• Please ensure to include sufficient references in the work. (Min 8 references)

Please ensure zero plagiarism.

• Review the grading rubric to see how you will be graded for this assignment.

Learning Outcomes

1. Analyze how the exchange rate adjustments affect the Balance of Payments.
2. Evaluate how currency depreciation stimulates exports.

Readings

Required:

Chapter 13 in International Economics

Sule, I., & Shuaibu, M. (2020). Current account behavior, real exchange rate adjustment and relative output in Nigeria. Journal of Economic Development, 45(3), 77-99.

Emerging markets monitor. (2017). 23(29), 1-23.

Recommended:

Chapter 13 PowerPoint slides Chapter 13 PowerPoint slides – Alternative Formats

Rappeti, M. (2020). The real exchange rate and economic growth: a survey. Journal of Globalization and Development, 11(1). https://doi-org.sdl.idm.oclc.org/10.1515/jgd-2019-0024

Please, it is important to carefully read and understand all the requirements of the question before providing the answer. Please ensure that you follow all the instructions given.

I have attached all the necessary documents. PowerPoint, textbooks. question requirements.

Please ensure to include sufficient references in the work. (Min 8 references)

Please ensure zero plagiarism. (very very important)

Answer preview

The reaction to increased American travel to Europe in a dirty float system, which is characterized by the tendency of occasional governmental interference in the foreign exchange market, would be complex. There would be some currency adjustments that would be allowed to happen in line with market forces and central bank adjustments. However, the level of intervention would depend on the particular policy position adopted by the central bank. In case the government identifies that the depreciation might be too much for the economy, then the depreciation would be moderated by the state. According to Alstadheim et al. (2021), this could come about through disposing of U.S. dollars or acquiring euros to manipulate the rates under specified limits. A dirty float system is flexible enough to allow a balance of market-driven adjustments and control intervention to handle volatility.

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