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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 day¡is 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 e£ects 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 a£ecting exchange rates. (c) The &psychological e£ect¡of a &stated intention¡to intervene may be more pre- cisely stated as an e£ect 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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This note was uploaded on 01/28/2011 for the course ECON 304 taught by Professor Michaelpeters during the Spring '10 term at UBC.
- Spring '10