Financial and Economic Global Strategy Questions and Answers

Expound on the balance of payments/current account view of exchange rates. 

Balance of payments involves the assessment of global financial activities between citizens of a nation and international traders. The contents of the balance of payments include current, economic, and capital accounts. The BOP contains negative and positive cash flows that must balance. The records of imported goods and services are recorded in the balance of payments. However, the financial transactions are also recorded in the financial account of the BOP. The fluctuations in exchange rates affect the operations in the balance of payments. In the free or floating exchange techniques, the BOP influences the currency rates of different countries. The changes of the BOP occur to the fluctuations of the supply and demand for goods in various nations. However, the fixed rate does not affect the balance of payments of the traders because the central banks change the currency flows by offsetting the global exchange funds. 

Analyze the portfolio balance view. 

The portfolio balance perspective is similar to the AMA (Asset Market Approach). It provides that the strengths and weakness of a nation’s currency depend on the capital inputs or outputs of the country on buying the stocks. The financial agents such as international governments, corporations, and individual entrepreneurs can select from the collection of local and foreign assets in the form of shares or cash. Besides, the economic agents expect that the assets must have earnings to generate profits. The fluctuations in financial and monetary regulations can influence the expected returns or associated risks. Consequently, the anticipated benefits and relative uncertainties affect the exchange rates of the country. The arbitrage opportunities for the financial assets assist in determining the currency levels of the country. 

The portfolio balance perspective focuses on addressing the concepts of the capital account rather than the current records. William H. Branson developed the idea and is a primary contributor to the international economics subject. The theory describes the influence on interest rates on currency fluctuations. Besides, Branson explained that the interest rates are determinants of the changes in exchange levels. Businesspersons invest in areas with the highest standards of returns. Moreover, investors consider the relative interest levels to prevent losses on investments. Financial agents can compute the devalued or projected currencies using the interest level differentials. Subsequently, they can make decisions on holding their finances to avoid losses. For instance, economic agents can strengthen the dollar value by sending the USD to invest in the Euro. The case applies when the Euros have high-interest levels as compared to the dollars. 

Interest rates influence the currency value of countries. Selling Euros and buying dollars increases the supply of the currency, which decreases their amount. Alternatively, the demand for dollars increases, which strengthens its value. A rise in the capital input in a country indicates an increase in the currency value. Alternatively, an increase in the capital-output demonstrates currency devaluation because investors are seeking investment in a different region. The determinant on international equity investments are opportunities for financial development and profits. 

Explicate the monetary approach to exchange rates. 

The monetary technique is useful in establishing the nature of exchange rates. The primary models for financial approach were developed in the 1970s. However, economists have contributed to transforming the method to create modern monetary perspectives to exchange levels. The framework provides that the determinants of the exchange rates are currency supply and demand. Besides, the state monetary dividends, expected prices, and stock growth influence the currency process. The model provides that financial assets, including bonds, do not determine the exchange levels in countries. The perfect substitutes are international and local dividends. The analysts should not consider the balancing of the CA (Current Account). However, the agents should focus on the exchange of assets that have a significant effect on the exchange levels. The economic activities in the monetary framework affect the currency value regarding fluctuations in demand and supply. Also, the financial processes are determinants of inflation in an economy. High expected price increase indicates the devaluation in a country’s currency. 

In this framework, the circulation of money should be similar to the financial demand (M S = M D ). An increase in the money supply can cause an immediate reduction in currency value or depreciation. Besides, a decrease in money demand causes monetary devaluation. There is a significant relationship between money demand and interest levels. A rise in the rates of interest increases the presumed inflation in the relative levels. Also, it decreases money demand, and the currency value will fall in the future because investors will vacate to other regions to gain higher returns. Alternatively, if the interest rates drop and the levels of return increase, business persons are likely to invest in the country. The demand for money will increase, which decreases the currency rates. Besides, the increase in circulation of cash can reduce money value when Central Bank injects finances in a country’s economy. 

The circulation and purchase of currency affect the cash value regarding the relative earning or price rates in an economy. The demand for money increases and the prices of the goods rise because the public needs additional cash to acquire similar items. However, clients can access loans to finance their spending habits. A high relative earning is directly related to a rise in cash demand. Consumers are responsible for influencing the market for finances. 

The monetary approach has numerous presumptions regarding the inflation of an economy. The extended and continuous rise in cash circulation causes an increase in the price of goods or services in an economy. Consequently, the supply of cash in the economy reduces the currency value due to a decrease in demand. The other determinants of monetary rates include factors that affect circulation and purchasing of currency. For instance, the fluctuation of exchange levels occurs after the international and local prices rise. The primary concepts of the monetary framework include PPP, steady demand for finances and flexible outputs. 

Compare and contrast the efficiency, fundamental, and technical views of exchange rate determination. Give numeric examples. 

Fundamental and technical assessments are the basic theories for assessing the financial markets in a country. Technical analysis focuses on changes in prices of securities, and the information is utilized in predicting the future value of goods. Alternatively, fundamental assessment focuses on financial elements that affect business operations. Technical analysts assess the diagrams to determine trends that can predict the future price of goods and services in the market. However, not all technical analysts rely on graphs to predict the price levels, but they use indicators or oscillators. The previous prices and volumes are useful in performing a technical analysis. Fundamental analysts focus on the undervalued inventory, but technical experts consider the safety of the last and future trading information. Technical analysts consider three assumptions in their computations. The professionals perceive that the market offers discounts to all activities. Thus, the stock value portrays all the events in the industry, including essential elements. Secondly, the price of the goods and services in the market fluctuates with the trends. A change in industry trends affects the future value of items. Thirdly, the technical analysts assume that history is repetitive. Therefore, experts use previous patterns to determine the next events in the industry. 

Fundamental analysts consider the intrinsic value of the stocks and to determine the gaps in the previous and current market value. The financial experts compute the future rate of the stock using essential factors in the industry. However, professionals use financial reports, including balance sheets and ICs, to establish stock values. The fundamental analysts take an extended period in assessing the prices as compared to the technical experts. The radical approach focuses on the long-term effects of the value because the primary objective is to invest. Thus, investors can purchase assets that are likely to increase in value in the future. Alternatively, the scientific method involves the current consequences of the trends. The information is essential for establishing trading decisions in the economy. 

Talk on the pros and cons of the IMF and the World Bank. 

The IMF has advantages and disadvantages that influence its operations across the world. The primary benefit of the organization is that it focuses on offering economic assistance to emerging countries and establishes monetary policies in different regions of the globe. The loan conditions are favorable because the borrower experiences low risks. Countries address the deficits using the loan amount, which cannot affect the country’s economic activities, including the high-interest levels. The IMF assists nations to avoid the gaps that can influence economic activities negatively. The states can experience a domino effect when recovering from financial constraints. Besides, economies that borrow from IMF are not required to repay the debts using the high-interest rates which assist them in recovering from the economic deficit. 

Besides, the organization has received criticism in spite of assisting countries to address economic deficit issues and preventing financial crisis. Tyson Alexander claimed that IMF facilitates global apartheid where developed nations across the world dominate over developing economies. For example, Africa and Asia own a disproportionate percentage of power in the IMF because they are less developed as compared to Europe. Besides, the Western countries discriminate the developing countries regarding the disbursement of IMF debts. The leaders of the organization are responsible for establishing disequilibrium and blame the countries on economic deficits. However, the IMF regulations are not useful in countries experiencing economic crisis and facilitate slow growth or worsen financial situations. 

The IMF loans have rigid conditions which affect the independence of the borrowers in spite of decreasing financial constraints and encouraging repayment. Besides, the debt term disregard the monetary policies, culture, and perceptions of the borrowers. Detractors perceive that the IMF debt terms are comprehensive in their recommendable refraining conditions. However, countries may experience adverse financial problems where necessary International Monetary Fund regulations cannot be useful. The organization has been forcing its borrowers to surrender independence as security for their debts. Therefore, the IMF does not provide a solution to the economic challenges of the country after controlling their financial activities. 

The International Monetary Fund does not offer relevant recommendations to the financial challenges of the country. For example, the organization can advise a country to reduce its spending rates if the economy has high expenses. Consequently, the reduction in government spending raises the GDP of the country. In other cases, the institution does not offer strong recommendations. For instance, a nation cannot stop importing oil if the expenses double. Crude oil is essential in facilitating different activities in the country, including transportation. The government cannot control the situation, but they can develop strategies for increasing income from exports to increase the GDP. 

The IMF has benefits and risks which affect the activities of countries across the world. The organization has different critics whose reasoning is valid. The evidence portrays that the organization facilitates the economic stability of countries that encounter deficits. However, the approaches of the institution are not useful, and there is a need for improvement. 

Besides, the World Bank offers technical and economic support to developing nations. The financial institutions provide loans to countries at low-interest. Besides, the World Bank delivers debts with no interest and grants to emerging governments to facilitate economic growth. The bank finances different activities in a country, including education, farming, health, and communication. However, the local banks, investors, organizations, and the state can finance the country’s projects. The bank offers assistance through trust funds collaborations and assists countries using research or technical support. The commercial facilities are similar to the World Bank’s objectives on eliminating poverty by 97% before 2030. However, the mission of the country is to facilitate development among low-income individuals across the globe. 

The World Bank receives criticism from different NGOs or scholars, including Henry Hazlitt and SI (Survival International). Hazlitt attested that the financial institution and its commercial structure could facilitate inflation in an economy. Besides, the scholar claimed that the World Bank could encourage the development of a world where one state is dominant. Joseph Stiglitz argued the free market regulations of the institution could hinder economic growth if a nation implements them wrongly. Besides, the policies are not useful in weak and uncompetitive countries. The World Bank is criticized because it disregards the reformations for legal institution after colonization. Therefore, the changes of the economic organization are detrimental, and the inferences to the legal concepts become unreliable. 

Elucidate the functions of the IMF. 

The International Monetary Fund is a global institution that supports different countries across the globe that attended the UN meeting in 1944 to enhance unity. The current chairperson of the organization is a woman and collaborates with the BOG to ensure that the organization meets the objectives. The board consists of the governor, deputy, and the members. The member nations elect the assistant governor. The institutional board has 24 members who are responsible for making critical decisions and developing plans to solve challenges. The IMF has 200 member nations who make contributions to determine their position in the world. Besides, the funds of each country establish their voting authority in the organization. 

The IMF acts as a bank to different nations where they receive deposits and lend to other affiliate countries. The goal of the institution is to achieve international economic unity and enhance trade among countries across the world. Besides, the organization focuses on attaining high employment levels with continuous development, secure financial stability, and decreases the poverty levels in the globe. The IMF performs its operations by giving policies, lending, and spreading information to assist countries in achieving the desired growth. The institution helps nations to gain economic stability. The primary responsibility of the organization is to offer uniformity in global monetary structure. It consists of the system of policies, exchange levels, supporting organizations, and global transactions which assist countries in trading with their partners. The IFS (international financial system) needs to instill confidence and offer resources or methods to nations to reduce global imbalances. The structure must have sufficient liquidity to regulate the change in trading levels. 

The IMF reviews a country’s policies by investigating to achieve sustainability of the structure and possible crisis. The financial organization advises and encourages nations to use different strategies to promote financial stability. However, the regulations are not useful for every country, and it is critical for economies to assess them continuously. The western nations influence the IMF strategies and policies which affect the operations of developing operations. The organization’s programs and financial activities are useful in correcting the imbalances in the country’s BOP. However, the economic activities reduce the fiscal deficits if the state uses the proper methods to implement the programs. The team can facilitate global trading and financial development after adhering to the strategies. The IMF encourages the members by offering protection to correct mistakes without developing conflicts between the member nations. 

Lastly, the IMF facilitates teamwork by spreading information to the members to promote the development and financial stability by improving their abilities. The institution offers training and resources to enhance the capacity of the countries. IMF focuses on designing and implementing laws that are useful in different areas, including tax regulations, money or exchange levels, managing expenses, legislature, or supervision of the economic structure. 

The IMF policies are not reliable because they do not solve the economic challenges of the world economy. Critics claim that the institution’s regulations on loans are not useful because they disregard the practices of the borrowers. Besides, some policies do not solve any challenge of the member countries. 

Compare and contrast the periods between the two World Wars and the period before that. 

The IFS facilitates global transactions and defines the transaction policies. The IMS (International Monetary System) is a collection of global restrictions that focus on facilitating foreign trade, encourage FDI, and transfers capital between nations. The activities of the IMS include exchanging different currencies and debts for addressing the current imbalances in the BOP. The commercial structure is an integration of contracts between nations and large-scale grants that describe the changing fiscal measures. 

The first and second World Wars affected the value of gold across the globe. The political activities during the battling period influenced the money principles and economic activities. However, currency values fluctuated significantly across different regions in the world. The volatile exchange rates affected the supply and demand for items. The traders expected that global trade activities could stabilize the IFS. However, the speculations increased the gap between strong and weak economies. The development of worldwide trade and GDP decreased notably during the Great Depression. 

The unemployment rates during the first and second WW increased due to the rise in inflation levels. The underlying economies during the period, including the United States, Britain, and France, engaged in a competitive devaluation conflict to ensure that their currencies did not reduce in value. The monetary valuation method focused on boosting competitiveness in the relationship between the dependent amount and exchange levels. The decrease in currency value reduced import and export demand. Therefore, the sales of domestic goods increased due to the consumer changes in preferences. Economists, including Jane Robinson, claimed that the countries exported unemployment to other regions to achieve a stalemate condition. Gold was used to value currencies at the beginning of WWII. As the war progressed, trading and capital mobility activities decreased in different regions of the globe. Besides, the dollar was among the currencies that sustained convertibility. 

At the end of the Second World War, the value of the USD increased, which has been maintained in the modern world economy. However, the economy of most of the European nations was affected negatively. Subsequently, countries met in a conference to agree on the official currency in the IMS. The BWA (Bretton Woods Agreement) was developed where gold became the primary value in many economies. The contract was useful in facilitating the creation of the IMF and World Bank.