Fin Case

1. Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain.

It’s direct since the government exchange dollar reserves for baht in order to strengthen the currency. And because this action the demand for baht and the supply of dollars for sale would increase, that’s upward pressure on the bath. If Thai government wanted to strengthen the bath they could have increased interest rates by decreasing the Thai money supply then will be indirect intervention.

2. Did the intervention by the Thai government constitute sterilized or nonsterilized intervention? What is the difference between the types of intervention? Which type do you think would be more effective in increasing the value of the baht? Why? (Hint: Think about the effect of nonsterilized intervention on U.S. interest rates.)

Nonsterilized. Since the Thai government exchanged dollar reserves for baht in the foreign exchange market, the dollar money supply is increased. A central bank intervenes in the foreign exchange market without adjusting for the change inn money is using nonsterilized intervention and a central bank intervenes in the foreign exchange market while retaining the money supply is using sterilized intervention.

If the Thai government’s objective is to increase the value of the baht, nonsterilized intervention may be more effective. Because an increase in the money supply may decrease the U.S. interest rates, which may additionally weaken the dollar with respect to the baht. So, nonsterilized intervention may compound the desired effects of the intervention effort.

3. If the Thai baht is virtually fixed with respect to the dollar, how could this affect U.S. levels of inflation? Do you think these effects on the U. S. economy will be more pronounced for companies such as Blades that operate under trade arrangements involving commitments or for firms that do not? How are companies such as Blades affected by a fixed exchange rate?

The high...