International Economics 16/11/61 Session 23 Internal and External Balance with Fixed Exchange Rates Aj.Noom (anuphak@gmail.com) Tel.0835426434

Benefits of Fixed Rate Helps reduce Inflation Helps reduce uncertainty  For example, if a firm is exporting to the US, a rapid appreciation in the domestic currency would make its exports uncompetitive and therefore may go out of business.

Defending against Depreciation New Spot Rate S1$ D$ Dollars need to be sold Excess Demand

Defending against Appreciation Dollars need to be bought Excess Supply S1$ New Spot Rate D$

Money Supply & the Balance of Payment with Fixed Rate Government sell domestic currency Capital flows out to other countries offering higher interest rate There are a lot of competitions among the banks When income rise, people tend to buy more importing products. When price level increase, foreign customers will buy less domestic products. For a decrease in the money supply, reverse the direction of all changes.

Payments Adjustments for a Surplus Country with Fixed Rates When the domestic money is supplied, people do not need to hold money.

Expansionary Fiscal Policy & the Balance of Payment with Fixed Rate For contractionary fiscal policy, reverse the direction of all changes.

Foreigners buy more domestic currency than its need (Less domestic currency in the system) Government have to sell its own currency Foreigners buy less domestic currency than its need (More domestic currency still in the system) Government have to buy its own currency.

Employment & Fixed Exchange Rate The government achieve both full level of employment and the balance of payments Easy fiscal policy (The government spends more budgets) Tight monetary policy by buying the domestic currency back. ( As the domestic currency is less, the interest is higher; the need to hold the money is greater.) What would happen if the scenario is different from this ?

Perfect Capital Mobility This happens to a small country that cannot influence global financial markets by itself. The defense of fixed exchange rate will not impact on the interest and the domestic production. The interest rate depends on the global interest. For FE curve, any interest rate above or below 6% will impact on the capital inflows to this country, but will not influence the domestic product. For LM curve, any interest rate above or below 6% will impact the need to hold the currency of this country, but will not influence the domestic product. For IS curve, the shift of the curve has an effect on the domestic product, but no effect on the interest rate.