Question

6) If we expect our currency to appreciate with respect to the currency of our northern neighbor and the interest rates are the same in both nations, in which nation does it make sense for us to invest? Show your work.

Answer 1

6 Answer-

Invest in our country-Other than interest rates playing a role in currency appreciation,expectations of such appreciations could be as a result of the following factors which indicates an improvement of the economy.These factors include;

Reduced inflation-Which causes goods to be more attractive causing its demand to rise

Political stability

Productivity growth

Economic stability

With interest rates constant in both countries,currency appreciation means that the above factors are at play and thus make our country safer to invest in our Northern friend neighbor.We should therefore choose to invest in our country

8 Answer-  

• Fixed exchange rate supports the competitiveness of a nation's goods
• With the currency valued lower, the earnings on exports are higher, for instance, China & Vietnam
• Supports higher economic growth, and, an improved standard of living for its citizens

Cons

• Currency reserves are required for maintaining the fixed exchange rate
• A large amount of funds (money supply) capital can lead to higher inflation
• Exposed domestically due to the inability to defend the underlying fixed rate