How could we get an inflation in a currency that is already pegged to another one like dollar (fixed rate)?
Thursday, January 2, 2014
, Posted by Ryanita at 9:00 AM
Mebtlsha
Let say that the Dollar brings 3 real of country A,and the real is actually pegged to Dollar ,so it is considered fixed currency rate ( not floating ) .And now that we have inflation in Country A ,while the dollar is still= 3 real of country A ?
my Question is, how could we detect an inflation in Country A while its' exchange rate is not appreciating or depreciating to dollar?
is that we have to compare it with another strong currency like Euro?
Answer
Under a fixed exchange rate regime the changes in the domestic price level are a reflection of the inflation in other countries. In other words, inflation is 'imported' from abroad.
Example: An increase of the domestic money supply means that domestic residents have excess money balances which will increase the aggregate demand. This will increase the domestic prices. Assuming the Purchasing Power Parity concept, the increase in the price level moves the domestic economy into an uncompetitive position and the balance of payment into a deficit. In order to maintain the foreign exchange rate at the prescribed level, the government has to intervene in the forex market which will reduce the money supply, effectively reversing the monetary expansion and move the domestic price level back to its original state.
The key concept is the Purchasing Power Parity model which postulates one price for the same good in different currencies: the exchange rate E is determined by the domestic price level Pd divided by the foreign price level Pf: E=Pd/Pf. If you hold E constant, as in a fixed exchange rate regime, the domestic price level will only change if the foreign prices change as well.
Under a fixed exchange rate regime the changes in the domestic price level are a reflection of the inflation in other countries. In other words, inflation is 'imported' from abroad.
Example: An increase of the domestic money supply means that domestic residents have excess money balances which will increase the aggregate demand. This will increase the domestic prices. Assuming the Purchasing Power Parity concept, the increase in the price level moves the domestic economy into an uncompetitive position and the balance of payment into a deficit. In order to maintain the foreign exchange rate at the prescribed level, the government has to intervene in the forex market which will reduce the money supply, effectively reversing the monetary expansion and move the domestic price level back to its original state.
The key concept is the Purchasing Power Parity model which postulates one price for the same good in different currencies: the exchange rate E is determined by the domestic price level Pd divided by the foreign price level Pf: E=Pd/Pf. If you hold E constant, as in a fixed exchange rate regime, the domestic price level will only change if the foreign prices change as well.
What is forex and currency trading. Is it a kind of business?
Katherin J
Please let me know in detail abut the forex and currency trading business?
Answer
It's a way to invest your money kind of like the stock market. You are buying and selling, just like the stock market. But rather than buying and selling the actual currency itself, you are buying and selling the DIFFERENCE in value (aka the exchange rate) between two different currencies.
Best way to get into the Forex is to open a demo account at http://comefollowme.zulutrade.com/Performance.aspx and add some strategies to your portfolio. It's all free, and it's the largest Forex strategy website in the world. I'll post some more links below in my sources.
It's a way to invest your money kind of like the stock market. You are buying and selling, just like the stock market. But rather than buying and selling the actual currency itself, you are buying and selling the DIFFERENCE in value (aka the exchange rate) between two different currencies.
Best way to get into the Forex is to open a demo account at http://comefollowme.zulutrade.com/Performance.aspx and add some strategies to your portfolio. It's all free, and it's the largest Forex strategy website in the world. I'll post some more links below in my sources.
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