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CHAPTER 3 "EXCHANGE RATE DETERMINANTS AND FORECASTING", NAME:…
CHAPTER 3 "EXCHANGE RATE DETERMINANTS AND FORECASTING"
Roles of International Monetary Fund (IMF)
Lending
The IMF lends money to nurture the economies of member countries with balance of payments problems instead of lending to fund individual projects.
This assistance can replenish international reserves, stabilize currencies, and strengthen conditions for economic growth.
The IMF expects the countries to pay back the loans, and the countries must embark on structural adjustment policies monitored by the IMF.
Lending through the IMF takes two forms. The first is at non-concessional interest rates, while the other comes with concessional terms. The latter is advanced to countries with low income and bears very low or no interest rates at all.
Technical Assistance
The third main function of the IMF is through what it calls capacity development by providing assistance, policy advice, and training through its various programs.
The organization aims to strengthen human and institutional capacity. This is very important for countries with previous policy failures, weak institutions, or scarce resources.
Through capacity development, member nations can help strengthen and improve growth in their economies and create jobs.
Monitoring Member Country Economies
To monitor the economies of its 190 member countries. This activity, known as economic surveillance, happens at both the national and global levels.
Through economic surveillance, the IMF monitors developments that affect member economies as well as the global economy as a whole.
Member nations must agree to pursue economic policies that coincide with the IMF's objectives. By monitoring the macroeconomic and financial policies of its member countries, the IMF sees stability risks and advises on possible adjustments.
International Monetary Fund (IMF)
An organization of 190 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
The IMF was established in 1944 in the aftermath of the Great Depression of the 1930s.
44 founding member countries sought to build a framework for international economic cooperation.
Today, its membership embraces 190 countries, with staff drawn from 150 nations.
The major determinants of exchange rate
2. Interest rates
interest rates are tightly tied to inflation and exchange rates. Different country’s central banks use interest rates to modulate inflation within the country.
For example, establishing higher interest rates attracts foreign capital, which bolsters the local currency rates.
However, if these rates remain too high for too long, inflation can start to creep up, resulting in a devalued currency.
4. Governments controls
have a collection of tools at their disposal through which they can manipulate their local exchange rate.
Primarily, central banks are known to adjust interest rates, buy foreign currency, influence local lending rates, print money, and use other tools to modulate currency exchange rates.
The primary objective of manipulating these factors is to ensure favorable conditions for a stable currency exchange rate, cheaper credit, more jobs, and high economic growth.
1.Inflation rates
Inflation is the relative purchasing power of a currency compared to other currencies.
For example, it might cost one unit of currency to buy an apple in one country but cost a thousand units of a different currency to buy the same apple in a country with higher inflation.
3. Income level
of the country determines the imports demanded which affects the exchange rate.
For example, if the US income level rises while the British level of income remains the same.
The scenario will represent three situations:
a) the demand schedule for pounds will shift outward reflecting the increase in US income and therefore increased demand for British goods,
b) the supply schedule of pounds for sale is not expected to change.
c) exchange rate of pounds will rise.
5. Capital Flows
Foreign capital tends to flow into countries that have strong governments, dynamic economies, and stable currencies.
A nation needs a relatively stable currency to attract capital from foreign investors.
Otherwise, the prospect of exchange-rate losses inflicted by currency depreciation may deter overseas investors.
NAME:
AIN NADHIRAH BINTI ABU BAKAR
MATRIC NUMBER:
08DPI19F1011
CLASS:
DPI 5A