Pls do not handwrite the answer, this is for easy reading ai) Hong Kong has a fi
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Question
Pls do not handwrite the answer, this is for easy reading
ai)
Hong Kong has a fixed exchange rate policy while Singapore has a managed floating exchange rate policy. Compare their different approaches both as small and open economies in terms of their relative exchange rate stances (with appropriate diagrams) and in warding off externally induced financial crises (such as the Asian financial crisis in 1997)
aii)Table 2: Effectiveness of monetary and fiscal policy in promoting internal balance for an open economy
Explain and analyse the relative effectiveness of fiscal policy and monetary policy (expansionary or contractionary as befitting the case of dealing with a recession
or an over-heated economy, respectively) in an open economy according to Table 2.
Monetary Policy Strengthened Weakened Fiscal Policy Weakened Strengthened Exchange rate regime Floating exchange rate Fixed exchange rate Table 2Explanation / Answer
Answer:
Fixed Exchange Rate: It is also called as Pegged Exchange rate. In this system, a currency is fixed against either another country's currency or a basket of currency or sometimes with gold also. The main purpose of fixed currency is to keep the currency value within a narrow band.
Floating Exchenge rate: It is based on the concept of supply and demand. This system determines the currency value in relation to supply and demand of other currencies. In this, the currency price is set by forex market based on supply and demand compared of other currencies in forex market.
Fiscal Policy: Fiscal policy is basically the use of governement spending and taxation to influence the economy.
Fiscal policy is said to be contractionary when the government revenues are greater than governement spendings. When the economy is in the state of exceptional growth, then contractionary policy will be used. This situation will create the situation of inflation. At that time, the government will decrease their spendings and increase the tax rates. this will result in slow in growth.
Fiscal policy is said to be expansionary when government spending is higher than governement revenues. When an economy is in recession, expansionary fiscal policy is in order. During recession, the aggregate demand is at a lower level than it would be in full employment situation. At that time , the government will increase their spendings or lower the tax rates.
Monetary Policy: Monetary policy is how central bank manages liquidity to create economic growth in any country. There are two main objectives of Monetary Policy - Inflation control and full employment.
Central bank uses Contractionary monetary policy to reduce inflation during high growth period. They done that by increasing the interest rates.
Central bank uses Expansionary monetary policy to avoid recession and lower unemployment. They done that by lower interest rates.