Answers
Also, is it possible for an increase in foreign exchange reserves elevate the inflation?
An increase in foreign exchange reserves helps an economy by increasing the "cushion" it has against excessive variations of the exchange rate. This is particularly important for fixed exchange regimes where it is vital for an economy to keep its exchange rate constant, so the greater the reserves the easier it it for this given economy to defend its parity because it can conduct market operations (selling or buying foreign exchange) to maintain their parity.
It can also be important for floating regimes when the variations in the exchange rate are so great that they can disrupt the international trade of this economy and, obviously, destabilize the economy. Once again, the greater the reserves, the better off the central bank is to intervene the foreign exchange market.
For your second question, more reserves don't raise inflation per se.
Explanation of Foreign Exchange Reserves and Gold. www.MarketSkeptics.com
We were assigned to analyze a news article and mine is about the Philippine government's measures vs. inflation and selling its remaining Petron shares is one of their measures. It was said that this will help increase Foreign Exchange Reserves. Now, I'm wondering how this can help reducing the effects of inflation.
A central's bank sale of domestic currency to buy foreign assets in the foreign exchange market results in an increase of the monetary base.
The increase in the money supply will lead to a higher real money supply in the short run which will cause the interest rate on domestic currency assets to fall shifting the demand curve to the left.
When the demand curve shifts to the left prices go down to reach a new lower equilibrium level.
Since the US economy is pretty much going the drain now, if China chooses now to switch a large amount of their foreign exchange reserves to Euro. What affects will this have on the US economy?
The end of the United States as we know for the rest of our and our childrens lifetimes. That is what the bailout is about actually! If the government doesnt step in to guarantee the debt crisis, foreign investors will lose faith in Americas ability to repay its debt and will rid themslves of the bad risk. If you think 700 Billion is bad, add on to no more foreign investment to support our national debt.
China will lose in the short term and gain in the long term. China is now both the supply and demand side of the economic global equation. The United States is still the largest economy, but this bailout hammers it into a fractured orphan of what it once was.
add on the true cost of the war including four hundred billion in medical costs, death benefits, etc.. and you've got a 1.5 trillion lead weight around an economy that doesnt make or produce squat!
In conclusion, i what you are saying were to happen, you would see 30-40% unemployment, a DOW in 8,000 territory, A dollar that has a value you could literally (not joking) wipe your butt-hole with. Everything you buy comes from abroad and is bought in dollars, if it costs 2,000 dollars for a good flat screen and the dollar loses 80% of its value, that television will cost 80% more. ($3,600.00) $10 per gallon gas.. No one drives.. No one buys anything.. No roads get fixed or constructed.. no loans for houses or for business are issued.. we evaporate.. Robert Putnam wrote a book about this once.. It was about how all the superpowers lost their power by overextending on Military.. Rome.. England.. Spain.. Russia..
History repeats itself my friend.. and the USA has no bright spot at the end of the long and dark tunnel.
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We were asked to analyzed this article
http://business.inquirer.net/money/topst ories/view/20080707-146930/Foreign-excha nge-reserves-climb-to-367B-in-June
The law of supply is the only thing that I can think to use in this article. Well, it is a micro-economic concept but our class is macroeconomics. What macroeconomic concepts can I use?
:) law of supply may not be the right tool to analyze this
in this article you may analyze the possible change in
BOP (improved)
Exchange rate (may rise)
interest rates ( may rise reflecting a rise in C and I )
inflation and unemployment
international confidence, leading to more investments
GDP
etc
From trade, right? But when companies sell their products in foreign markets, it's the companies who collect the revenue, not the government right? So how does all this foreign money end up in possession of a central bank?
From trading their own currency.
America's Chinese disease (not quite what you think)
Another set of lessons that Asian economies took from the crisis of the 1990s may be more problematic. Because strong export markets helped Asia recover from that crisis, and because many countries in the region were badly hurt by sharp reversals in capital flows, the crisis strengthened Asia’s commitment to export-led growth, backed up with large current account surpluses and mounting foreign exchange reserves. In many respects, that model has served Asia well, contributing to the rapid growth rates in the region over the past decade. In fact, it bears repeating that evidence from the world over shows trade openness to be an important source of economic growth. However, too great a reliance on external demand can also pose problems. In particular, trade surpluses achieved through policies that artificially enhance incentives for domestic saving and the production of export goods distort the mix of domestic industries and the allocation of resources, resulting in an economy that is less able to meet the needs of its own citizens in the longer term.
WORLD BULLETIN- TURKEY NEWS, WORLD NEWS [ Turkey's CB says foreign ...
Foreign exchange reserves of the Turkish Main Bank rose to 70.844 billion USD as of October 16, the bank said on Thursday.
The reserves were 70.672 billion USD on October 9.
In its weekly announcement, the Important Bank said that Turkey paid back 533.12 million USD of foreign indebtedness between October 1 and 21. Turkey's foreign straitened repayments amounted to 10.104 billion USD since the origin of 2009.
Turkey repaid 15.7 billion USD in 2008.
AA
News
UPDATE 2-China says FX reserve diversification is long-termReuters - Oct 26, 2009
BEIJING, Oct 26 () - Diversification of China's $2.27 trillion stockpile of foreign exchange reserves is a long-standing policy that aims to avoid Dollar Falls on PBOC Official's Call to Adjust Reserves(Over)Excitement About China's ReservesChina should boost euro, yen in reserves: report - -all 375 news articles »
Wall Street Journal - Oct 26, 2009
"The country is getting more aggressive in allocating money overseas to diversify its massive amount of foreign-exchange reserves. China resumes quotas for overseas investmentQDII funds to receive new quotasall 12 news articles »Forbes - Oct 26, 2009
called in an opinion piece on Monday for China to buy more euros and yen for its foreign exchange reserves said he was expressing purely personal views. and more »Bloomberg - Oct 14, 2009
By News Oct. 14 () -- China's foreign-exchange reserves, the world's biggest, surged as an economic recovery attracted speculative Chinese Reserves Hit $2.273 TrillionChina foreign reserves at $3tAsia FX reserves jump $112 bln in Sept to record high - -all 38 news articles »The News International - Oct 26, 2009
More currencies to form part of Pakistan's forex reservesKARACHI: The State Bank of Pakistan (SBP) has initiated the process of bringing other currencies in the country's pool of foreign exchange reserves with a and more »