<6.3 EXCHANGE RATES> 

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"Because it was feeling 'under pressure,' 'weak,' 'not appreciated,' and less valuable relative to its partner!" 🤣 

"Hilarious, right?"

"What pressure?" "Why is it weak?" "What's the opposite of appreciated", "...why exactly does it have a partner?"

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"Let's define an exchange rate to find out."

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"Next, screenshot it and describe what you see, like this:"

"Over the past month, the USD has become more expensive in terms of HKD, it has faced upward pressure and appreciated (strengthened) from ≈$7.78 to around $7.81."

"...and enter it into the Padlet below."

A GOVERNMENT can use policies to RAISE the exchange rate if it feels it is too low and damaging the economic performance; it can...

1) DECREASE the SUPPLY of HKD, 

by RAISING 'EXPENDITURE SWITCHING POLICIES' such as HIGHER TARIFFS, it makes IMPORTS MORE EXPENSIVE, so Hong Kongers will supply less HKD in exchange for GBP, and thus the supply curve shifts to the LEFT and the HKD APPRECIATES.

2) INCREASE the DEMAND for HKD

by SELLING its FOREX RESERVES & BUYING HKD, in doing so the demand for HKD curve shifts to the RIGHT and the HKD APPRECIATES. + When it buys the HKD, it stores it in its RESERVES, meaning the overall market supply of HKD available shrinks, shifting the HKD supply curve to the LEFT, and the HKD further APPRECIATES. (Note this is referred to as an DECREASE IN OFFICIAL (FOREX) RESERVES)

by RAISING the INTEREST RATE it INCREASES THE REWARD FOR SAVING IN HONG KONG BANKS, hence FOREIGNERS WILL BE MORE WILLING TO SAVE IN HK, thus they will DEMAND MORE HKD, which will shift the demand for HKD curve to the RIGHT and the HKD APPRECITATES.

• SPECULATORS are investors who seek to predict movements in exchange-rates so that they can make profits for example. If you think the GBP will appreciate against the HKD, meaning the GBP will be worth more HKD in the future, then a HK speculator will likely INCREASE THEIR SUPPLY OF HKD now in exchange for GBP.

A GOVERNMENT can use policies to LOWER the exchange rate if it feels it is too high and damaging the economic performance, it can...

1) INCREASE the SUPPLY of HKD, 

by PRINTING & SELLING HKD & BUYING FOREX, in doing so the supply of HKD curve shifts to the RIGHT and the HKD DEPRECIATES. (Note this is referred to as an INCREASE IN OFFICIAL (FOREX) RESERVES.)

by REMOVING 'EXPENDITURE SWITCHING POLICIES' such as LOWER TARIFFS, it makes IMPORTS CHEAPER, so Hong Kongers will demand more GBP in exchange for HKD, and thus the supply curve shifts to the RIGHT and the HKD DEPRECIATES.

2) DECREASE the DEMAND for HKD

by LOWERING the INTEREST RATE it REDUCES THE REWARD FOR SAVING IN HONG KONG BANKS, hence FOREIGNERS WILL BE LESS WILLING TO SAVE, thus they will DEMAND LESS HKD, which will shift the demand for HKD curve to the LEFT and the HKD DEPRECITATES.

"In each of these cases, decide whether the HKD/GBP rate would appreciate or depreciate."

• If imports were greater than exports: "If HK's net exports are negative, then it means the supply of HKD to buy imports is greater than the demand for HKD to buy its exports; hence, overall there will be downward pressure and a depreciation of the HKD."

• If inward FDI was greater than outward FDI

• If HK interest rates were greater than in the UK

• If Tariffs were higher in the HK than in the UK

• If more tourists cam to HK than the UK

• If the HK gov't sold more HKD for GBP, than the UK gov't sold GBP for HKD

"HKD depreciates against the GBP."

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"IMPORTS from UK, in terms of HKD, become EXPENSIVE!"

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"As HKD price of UK imports rises, the quantity demanded of UK imports by HKD holders naturally decreases."

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"...this (law of demand) causes a movement up the demand curve for UK imports priced in HKD."

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"But does this result in an overall fall in import expenditure?"

"HKD depreciates against the GBP."

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"EXPORTS become CHEAPER and EXPORT REVENUE RISES!"

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"IMPORTS become EXPENSIVE & IMPORT SPENDING FALLS"

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"NET EXPORTS increases..."

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"...AD increases"

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"If the economy is already at full-employment..."

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"Demand-pull inflation occurs!"

"HKD depreciates against the GBP."

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IMPORTS become EXPENSIVE.

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"...demand for UK imports is INELASTIC, so IMPORT EXPENDITURE RISES."

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"Imported RAW MATERIALS & FINISHED GOODS are more EXPENSIVE."

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"RAISES the COSTS of PRODUCTION for domestic firms,

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"Domestic firms raise their PRICES."

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"Cost-push inflation occurs!"

"Can you think how the idea of 'certainty of grades,' 'the need for maintenance of grades,' and 'the number of offers' relates to 'the predictability of exchange rates,' 'their stability,' and 'the number of trades facilitated'?"

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"That's right, 'certainty of exchange rates' leads to 'more trades,' as there is no 'currency risk,' but this level of certainty can only be maintained through 'constant government interventions.'

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• We saw earlier how the government can influence the demand and supply of the currency; therefore, complete these sentences in your book...

"When there is DOWNWARD PRESSURE on the HKD:GBP rate due to either 'a rise in the supply' or 'a fall in demand,' the central bank can intervene to counter this in the following ways..."

"When there is UPWARD PRESSURE on the HKD:GBP rate due to either 'a fall in the supply' or 'a rise in demand,' the central bank can intervene to counter this in the following ways..."

• "No need to maintain the rate, therefore 

• A floating system MAY SELF-CORRECT A TRADE IMBALANCE. For example,... 

If DEMANDm > DEMANDx 

S of HKD > D for HKD 

SURPLUS of HKD

HKD will naturally DEPRECIATE

EXPORTS become CHEAPER

IMPORTS become EXPENSIVE

DEMANDx will INCREASE?

DEMANDm will DECREASE?

TRADE IMBALANCE CORRECTED

• Even with a deficit between what the country has earned from exports and what it has spent on imports, however, demand for the currency may rise. Firms and individuals may still buy more of the currency to invest in the country, if they think that economic prospects are good. So, in practice, there is no guarantee that a floating exchange will eliminate a current account deficit. 

• NO NEED TO USE UP/KEEP  FOREX RESERVES to maintain a fixed value.

• NO NEED TO IMPLEMENT POLICIES that may CONFLICT with its OTHER GOVERNMENT OBJECTIVES. For example, a central bank can pursue expansionary monetary policy and lower the interest rate without worrying about the likely downward pressure on the exchange rate.