Answers for the Examination Papers Essay Example | Topics and Well Written Essays - 2500 words

Answers for the Examination Papers - Essay ExampleThe cornerstone of these attacks is a unfortunate monetary policy of the government (the gap between monetary policy and fixed exchange valuate). jibe to Krugman, the prerequisite for the currency crisis is the budget deficit that in turn is financed by the credits this process may entail the depletion of the militia of the currency (reserves of the currency to which a national one is pegged). If the domestic interest count equals foreign interest rate, than the supply of the money caused by the expansion will be more than the occupy on the national currency. The surplus of the domestic currency on the market leads to the increased demand on the foreign currency. In order to satisfy demand on the foreign currency, the national bank has to parcel out the reserves of the foreign currency. Once the reserves have been depleted, the national bank will have to dispense with its fixed exchange rates policy as it will have no suffic ient reserves to sustain it(Crznar, Currency crisis supposition and practice with application to Croatia). Certainly as several decades have passed since the homework of this model by Paul Krugman it has been readjusted to reflect current trends and realities, however in view of many critics this theory has one important flaw contention that a government could be a passive observer on the market and will do little or nothing at all to allay monetary and fiscal problems of the country. Usually the government could readjust its monetary and fiscal policy to the exchange rate regime it maintains.Second generation model. In view of the crisis of European Monetary System in 1992, in the raw theories of causes of currency crisis have been developed. According to this model, the government maintains fixed exchange rate regime as huge as it deems necessary to do so( it might do it to decrease inflation or to establish more predictable environment for its importers and exporters. Howeve r, the government will certainly