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Unformatted text preview: Econ 356 Introduction to International Finance Spring 2010 Department of Economics, University of British Columbia Viktoria Hnatkovska Problem Set 6: Solutions. 1. Problem 5, Chapter 17 in KO, 8th edition. (a) Germany clearly had the ability to change the dollar/DM exchange simply by altering its money supply. The fact that &billions of dollars worth of currencies are traded each dayis irrelevant because exchange rates equilibrate markets for stocks of assets, and the trade volumes mentioned are ows. (b) One must distinguish between sterilized and nonsterilized intervention. The evi- dence regarding sterilized intervention suggests that its eects are limited to the signaling aspect. This aspect may well be most important when markets are &un- usually erratic,and the signals communicated may be most credible when the central bank is not attempting to resist clear-cut market trends (which depend on the complete range of government macroeconomic policies, among other fac- tors). Nonsterilized intervention, however, is a powerful instrument in aecting exchange rates. (c) The &psychological eectof a &stated intentionto intervene may be more pre- cisely stated as an eect on the expected future level of the exchange rate. (d) A rewrite might go as follows: To keep the dollar from falling against the West German mark, the European central banks would have to sell marks and buy dollars, a procedure known as intervention. Because the available stocks of dol-dollars, a procedure known as intervention....
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- Spring '10