Quote:
Originally Posted by Gaffa
1. If inflation is low and a Central Bank is concerned about recession, what would the expected monetary policy response be?
- Central Banks would lower interest rates to kick start the domestic economy by encouraging domestic investment. (Housing etc)
2. If inflation and growth are both high what would the expected monetary policy response be?
-Central Banks would raise interest rates to cool inflation.
3. If a central bank raises interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?
-The currency should rise as foreign investors look for a place to park there money
4. If a central bank lowers interest rates, what affect if any is this expected to have on the currency of that country, all else being equal?
-The currency should fall as foreign investors look for better returns elsewhere
5. If a country's imports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?
-Rising Imports without rising exports would cause a trade deficit and the currency would suffer.
6. If a country's exports grow and all other trade and capital flows remain equal, what affect would this have on the current account and what would be the expected affect on the currency if any?
-Rising exports without rising imports would cause a trade surplus and the currency would be stronger.
7. If a country is a major exporter of gold and the price of gold moves up by 50% over the course of a year, what would be the expected affect if any on that country's currency all else being equal?
-Mmm this one got me thinking... does price effect demand for this commodity.... ok I'll going against the grain here... the currency will FALL
(Gold confuses me because as I read once "all the Gold that has EVER been mined is still out there to be traded")
8. Japan is a major importer of oil and Canada is a major exporter of oil. If the price of oil goes up by 50% over the course of a year, then what affect if any should this have on the CAD/JPY currency pair all else being equal?
-Demand for oil is pretty consistent regardless of price.... Loonie to rise.
9. Traders who follow US Dollar fundamentals pay particular attention to any numbers which reflect the overall health of the consumer. Why?
-Consumer Confidence
10. The US Economy in the past was referred to as an Industrial Economy, now it is referred to more as a ______Service 79%__________ Economy.
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Hi Gaffa,
Thanks for participating it seems that you have a good handle on things as well.
1. Correct Answer - decrease in rates expected to try and spur growth
2. Correct - increase in rates expected to reign in inflation
3. Correct - currency should strengthen as more foreign capital flows in.
4. Correct - currency should weaken as more capital flows out.
5. Almost Correct - you are correct that the currency should weaken and you are correct that the current account balance should decrease however a rise in imports without a change in exports does not necessarily cause a deficit. I could simply reduce a positive current account balance.
6. Partially Correct - You are correct that the currency should strengthen and the current account should increase, however a rise in exports without a change in imports will not necessarily create a surplus. It could simply make the deficit less negative.
7. Incorrect - I am actually impressed that you thought about the affect of the price rise on demand as this shows me that you are thinking about things on a high level. But in this instance the value of the currency should rise as demand drives the value of commodities like gold. This is actually why I put in the question "over a course of a year" because a spike in the price of gold over the short term could cause demand to drop and for that demand drop not to be reflected in the price of gold however this is very unlikely to be the case over the course of a year. If the price of gold goes up significantly over the course of a year as we are seeing now then this is more likely than not being driven by demand increases.
On the question of all the gold that has ever been mined is still out there to be traded if you would like to expand on that thought a little bit I would be happy to try and provide some insight but I am not sure what the thinking is on that one from just what you have said above.
8. Half Correct - the loonie should rise as more money flows into the country due to demand driven price increases over the long term however more money should also flow out of Japan as they have to pay more to import oil from other places. So yes the loonie will rise however the Yen will also fall meaning the rate for CAD/JPY should increase.
9. Partially Correct - Consumer confidence is one of the numbers that people pay attention to but the reason why this is so Important, and the answer that I am looking for on this one, is because consumer spending makes up over 2/3rds of GDP.
10. Correct - The US Economy is a Service Based Economy.
Thanks again for participating it seems that you have a really good handle on things as well and are ready to move forward.
Best Regards,
Dave