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Effects of high interest rates in an economy-ECONOMICS
Effects of high interest rates in an economy-ECONOMICS
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Strong or Weak Dollar is Better?
Strong is good. Weak is bad. These generalizations sound simple enough, but they can be very confusing when come to money. Is a "strong" U.S. dollar always good? Is a "weak" dollar always bad? Understanding of it is a necessary in marketplace. The term such as “Strong” and “weak” dollar is a “hot topic” which always bandied about by economist on a daily basis and also public. This issue is so important to almost every one. It seems like part and parcel of people who very concern about currency likes investors, economist, foreigners who study or working in the United State and so on.
What strong dollar and weak dollar mean? Strong dollar is strong in compare to other foreign currency while weak currency mean dollar weaker than other currency. The terms strong and weak, rising and falling, strengthening and weakening, appreciate and depreciate are relative terms in the world of foreign exchange. Recently, Federal Reserve cut the interest rate by half and another quarter cut, will the rate cut affect the exchange rate?
The Federal Reserve rate cut has weakened the dollar. Is the rate cut benefit to dollar? Weak dollar, lower currency compare to foreign currency, has no effect on price of local products which produce in the United State. But affect import and export goods. The United State firms find it easier to sell goods in foreign markets. Thus import American goods are less competitive pressure to keep price low. Thus, weak dollar benefit U.S exports by making American goods cheaper in foreign country. Foreign tourist can afford to travel and visit the United State. When dollar is falling, purchasing power of foreigner is increasing. Purchasing power is the amount of value of a good or services compared to the amount that you paid. So when dollar is depreciating, exchange rate becomes smaller. Exchange rate (foreign-exchange rate, forex rate or FX rate) is the number of units of a given currency that can be purchased for one unit of another currency. The United State capital markets become more attractive to foreign investors. Since dollar is falling, it makes foreigner’s investment over United State more affordable. Therefore foreigners take this opportunity to invest in the United State.
On the other hand, there are disadvantages on weaken dollar. Weaken dollar is bad for America citizen. Weaken dollar lifted price import. Consumers face higher prices on foreign products or services.
The dollar will be worth less and less if the nation is in high debt. People will also be affected, when you have less money you spend and buy less due to increased prices, which can cause problems in the economy such as a recession or worse a depression. Budget deficit calls for the government to let costs exceed national income and use monetary policy to jump start the economy. The government must be careful when choosing the best way to build the economy. If the policies fail, they can lead the nation into many problems, as stated above.
Federal funds rate has risen the fifth time in 1994 on Nov 1994 and reaches 5.5%. This resulted in stronger dollar against peso as the quantity of US dollar reduced. This signaled problems for Mex...
Inflation is one of the main reasons for raising the interest rate, but currently inflation is not doing it usual numbers when it comes to a growing economy. It is expected for inflation to rise during this period but it is fact currently falling. So if inflation isn’t rising as expected that leads to the dollar being stronger than expect as well. Now a strong dollar is good and bad, it is bad because it will cause our exports to cost more for other countries. With a lot of other economies struggling recently the U.S. exports could take a hit because of lower conversion rates. Now if the Fed raises the interest rate to combat inflation the strength of the dollar may stay high, which in turn could hurt the export market of our
The dollar index, which gauges the dollar against other major currencies, has attracted much attention recently due to its fifteen year low. A low that reflects the dollars 60% fall since 2001 (Paul, What the Price of Gold is Telling Us). The low dollar is of interest to citizens, i.e. consumers, because it means that your goods are going to cost more while your paycheck remains the same and foreign firms are buying U.S. goods and resources at a deep discount. Father of Reaganomics, Economist Jerome Corsi stated:
The value of money is something hard to determine. Money is a commodity. For money allows us to establish prices for most goods and services available. Money exists because man realized that some things are more wanted and sought after than others. People sell things for money to increase their income and enrich their futures. They exchange things of equal price, but the values differ in the minds of those involved. For money must have five essential characteristics: (1) divisibility, (2) portability, (3) durability, (4) recognizability, and (5) scarcity.
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
To put it simply, the exchange rate is a price. As with any other market, price is determined by supply and demand. Whenever they are not equivalent, the exchange rate would change. However, the reality comes to be far more complicated.
The U.S. economy is very important to many governments around the world, which mostly depend on the U.S. to function properly. Without the strong economy that the U.S has had, the economy of the world economy would not be in a stable manner as it has been in the past years. Foreign economies depend on the U.S. economy for factors such as, importing and exporting goods. However the economy has not been doing well for the U.S. in the past few years, but slowly it is still repairing itself from a recession but the country is still not safe from being a country without economic
(Batra & Beladi, 2013) explains that it is well known to that nations that have high trade deficits have higher interest rates than those with balanced trade or surplus. They explain that this is now what has been happening with the United States, which has had a bad trade deficit since 1982. The United States interest rates have been lower than those in several other trade-surplus nations, however the rates did fall even as the trade “shortfall” went up. This generated an interest rate “paradox”. Batra & Beladi, also explains that unlike other nations, the trade deficit that continues to rise is the cause of lower United States interest rates and it happened because of the “world’s strong interest in maintaining a high value of the dollar” (Batra & Beladi, 2013).
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
Paper money is more complex. From 1900 through 1971 (with the exception of during World War I), the US dollar was backed by gold, meaning its value was legally defined by a certain weight of the metal. That ended in 1971, when Richard Nixon shocked the world by breaking the link to gold and allowing the dollar’s value to be determined by trading in the foreign exchange markets. The dollar is valuable not because it’s as good as gold, but because you can buy goods and services produced in the United States with it—and, crucially, it’s the only form the US government will accept for tax payments. Among the Federal Reserve’s many functions is allowing the issuance of just the right quantity of dollars—enough to keep the wheels of commerce well greased without slipping into a hyperinflationary crisis.
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.
A currency depreciation will have both short and long term effects. In the short term, the exchange rate will cause a country’s exports to appear cheaper, thus also increasing the demand for those exports. Likewise, it will also make imports more expensive and reduce the demand. In the long term, the depreciation can lead to increased assumed demand, pushing economic growth. Higher assumed demand can also lead to higher real GDP and potentially inflation. All of this has the potential to impact the current account.
The foreign exchange markets allow the conversion of currencies, where it helps the firms to conduct trade more efficiently across the national boundaries. In addition, firms can shop for low cost financing in capital markets all over the world and then use the foreign exchange market to convert the foreign currency that they got into whatever currency they require. With the foreign exchange nowadays, anyone can go to other country by converting their domestic currency into the foreign currency. The foreign exchange will follow the rate of exchange according to the country's rate. But still, the foreign exchange market is actually dealing with fluctuation where sometimes it has upward and downward movement.
The U.S. dollar is used in most international transactions, and so what happens to the U.S.A. economy will be affected by the international financial resources.